A recent case illustrates that ignorance of the tax laws is no excuse for not filing returns. In Cogdon v. U.S. the issue to be determined was whether the taxpayer was subject to failure to file penalties for not filing an information return, (Form 5471). Form 5471, is one of a series of information returns that is required when a taxpayer has either Controlled Foreign Corporation, a Controlled Foreign Partnership, or an interest in a foreign trust. There are other information returns that are required when a taxpayer has received foreign gifts, or bequests in excess of threshold levels in a single year (Form 3520 & 3520-A).
The penalty for failure to file a timely Form 5471, is $10,000 per return, per year. If a taxpayer has multiple controlled foreign corporations, the penalty is applied to each return for each unfiled year. An exception to the penalty is if the failure to file was dues to reasonable cause. But the court in Cogdon stated the long standing rule that “neither ignorance of the law nor complexity of the tax laws constitutes reasonable cause for failure to file a substantially complete Form 5471″. The risk of penalty exposure is now increased as taxpayers must disclose “Specified Foreign Financial Assets” on Form 8938.
Form 8938 may now inspire taxpayers who have not filed information returns to do so, in which case they may also want to file unfiled information returns and ask for penalty relief based upon reasonable cause. Reasonable cause is a facts and circumstance test, but coming forward voluntarily may be the best choice. For taxpayers who also have unfiled Reports of Foreign Bank Accounts, the Offshore Voluntary Disclosure Initiative of 2012 (OVDI) may be an option. By entering the OVDI the taxpayer may limit all penalties to the OVDI civil miscellaneous penalty which would for some be a good outcome.