Form 5471 Penalty Relief: How to Get the $10,000 Penalty Reduced or Removed

In Farhy v. Commissioner, the IRS sought nearly $500,000 in Section 6038(b) penalties from a man who didn’t report his ownership of Belizean corporations. He won in the Tax Court, but the D.C. Circuit reversed and held that the IRS can assess and collect those penalties without filing a lawsuit.

That case shows how large these penalties can get. The data on relief points the other way. The National Taxpayer Advocate reports that when the IRS assessed these penalties automatically, it later abated 74 percent of them (a figure that covers Forms 5471 and 5472 together). Many people who get a Form 5471 penalty notice have a real path to getting it reduced or removed.

Many of the owners I talk with have a foreign company because of how their business grew, not because they were hiding anything, and they learn about Form 5471 from a penalty notice.

This guide covers what the penalties are, how reasonable cause works for this form, why First Time Abate mostly doesn’t help, what the courts have said, and the order of steps I’d follow if you’re facing a penalty or know you have missing forms. If you need the basics on who files and which category you fall in, start with our Form 5471 overview.

What Are the Form 5471 Penalties?

Form 5471 penalties start at $10,000 per form, per year, and can grow to $60,000 per form if you don’t file after the IRS sends a notice. A separate penalty can also cut your foreign tax credits.

Form 5471 is the information return certain U.S. persons file about foreign corporations they own, control, or serve as officers or directors of. The penalties come from 26 U.S.C. § 6038 and are summarized on the IRS’s international information reporting penalties page.

Two details matter for owners. First, the penalty applies to a form that is filed but incomplete or inaccurate, not just a missing one. The IRS says the $10,000 applies to each failure to file “a complete and correct Form 5471.” Second, the penalty is per foreign corporation, per year. Two foreign subsidiaries and three missed years means six separate $10,000 penalties.

A third penalty is easy to miss. Category 2 and 3 filers who fail to file Schedule O, the ownership-change schedule required under section 6046, face a separate $10,000 penalty under 26 U.S.C. § 6679. That penalty has its own reasonable cause exception and sits outside the section 6038(b) assessment debate discussed below, so a notice that cites section 6679 calls for a different analysis.

The Form 5471 instructions also note that criminal penalties under sections 7203, 7206, and 7207 may apply. That possibility is the reason the order of your next steps matters.

The Cost Most People Don’t See: Your Return Stays Open

While a required Form 5471 is missing, the IRS’s time to assess tax on the related return doesn’t run out. Under 26 U.S.C. § 6501(c)(8), the assessment period doesn’t expire until three years after you furnish the information.

If the failure was due to reasonable cause and not willful neglect, the extended period applies only to the items related to the missing form. Without reasonable cause, the whole return can stay open. For a business owner, that’s a cost on its own: every year with a missing form is a year the IRS can still examine.

You Don’t Have to Be Hiding Money Offshore to Owe This Penalty

The National Taxpayer Advocate found that 71 percent of Section 6038 and 6038A penalties against individuals were assessed against taxpayers with income of $400,000 or less, and the average penalty for those individuals was over $40,000. On the business side, small and midsize businesses made up 83 percent of the assessments.

The situations look like this:

• The growing business. A U.S. company sets up a sales office or subsidiary abroad, and nobody on the tax side flags the new filing.
• The officer or director. You sit on the board of a foreign company where a U.S. person bought shares, and you didn’t know that could create a filing requirement for you.
• The family company. You inherit or receive shares in a corporation your relatives run overseas.
• The late return. Your business filed its Form 1120 or Form 1065 late, and a Form 5471 was attached. The IRS’s manual says penalties may be systemically asserted during processing of a late-filed Form 5471 attached to those returns (IRM 20.1.9.3.3), even if the form itself is complete.

How Does Reasonable Cause Work for Form 5471?

Reasonable cause is the main way to get a Form 5471 penalty removed, and the request must be a written statement made under penalties of perjury. The IRS looks at whether you used ordinary business care and prudence and still couldn’t file on time.

The statute handles reasonable cause in a specific way. Section 6038(c)(4)(B) treats the filing deadline, and the start of the 90-day period after a notice, as no earlier than the last day reasonable cause existed. In practice, the defense covers the period your reason was in effect, so you need to show when it started, when it ended, and how quickly you filed after that.

The IRS manual, at IRM 20.1.9.3.5, repeats the procedural rules set by Treas. Reg. § 1.6038-2(k)(3):

• You must make “an affirmative showing of all facts alleged” in a written statement.
• For Form 5471, the regulation requires that statement to contain a declaration that it is made under penalties of perjury.
• The manual recommends not considering reasonable cause for any year until all delinquent returns have been filed. Fix every year first, then ask for relief.
• The manual says there is no separate reasonable cause exception for the continuation penalty. The statute, however, treats the 90-day period as starting no earlier than the last day reasonable cause existed, so the real question is when your reasonable cause ended. A statement showing you were still reconstructing foreign records after the notice can push that start date back.

What Tends to Help

The IRS’s general reasonable cause page lists the facts it weighs, including the complexity of the issue, your education and knowledge of tax law, and the steps you took to understand your obligation or get help from a tax advisor. A strong statement is a dated chronology backed by documents: when you acquired the interest, who prepared your returns, what you told them, when you learned about the requirement, and when you filed.

What Usually Doesn’t

The same IRS page says you’re “generally responsible for complying with tax law even if someone else handles your taxes,” and that you’re responsible for knowing or getting advice on how to file. Saying “my accountant didn’t tell me” or “I didn’t know” usually isn’t enough by itself. The Supreme Court drew the same line in United States v. Boyle: you can rely on an advisor’s substantive advice, but not on the advisor to tell you a filing deadline exists. What can work is showing you gave a qualified advisor all the facts, including the foreign ownership, and reasonably relied on their advice.

Does First-Time Abatement Apply to Form 5471?

Not directly. The IRS manual says the First Time Abate provisions do not apply to event-based filing requirements such as Form 5471 (IRM 20.1.9.3.5).

There’s one narrow exception. When a Form 5471 penalty was systemically assessed because the form was attached to a late Form 1120 or Form 1065, the manual allows that penalty to be abated along with the failure-to-file penalty on the related return, if the return’s penalty is abated and you had no similar Form 5471 penalties in the three prior periods. The manual applies this both when the return’s penalty is removed for reasonable cause and when it’s removed under First Time Abate.

That second route is changing. In July 2026 the IRS announced Automatic Exemption from Penalty (AEP) (IR-2026-83), which replaces First Time Abate for eligible returns with original due dates on or after January 1, 2027. The IRS’s AEP fact sheet (FS-2026-12) says AEP “does not apply to” information return penalties. For more on the change, see our article on the IRS replacing First Time Abate with AEP.

For most Form 5471 penalties, reasonable cause is the path.

Can the IRS Assess Form 5471 Penalties After Farhy?

Yes, in the two federal appeals courts that have decided the question. The D.C. Circuit and the Second Circuit both held that the IRS can assess Section 6038(b) penalties administratively, without first suing in federal court.

The timeline:

• April 2023: The Tax Court held in Farhy that the IRS had no authority to assess Section 6038(b) penalties.
• May 3, 2024: The D.C. Circuit reversed, holding that the “text, structure, and function of section 6038 demonstrate that Congress authorized assessment.”
• November 18, 2024: In Mukhi v. Commissioner, 163 T.C. No. 8, the Tax Court reaffirmed Farhy and said it would keep following its own reading in circuits that have not decided the question. Earlier in the same case, the Tax Court rejected the argument that these penalties are excessive fines under the Eighth Amendment.
• December 5, 2024: The Tax Court applied its Farhy reasoning again in Safdieh, a case appealable to the Second Circuit.
• February 27, 2026: The Second Circuit vacated that decision. The court wrote that, “Like the D.C. Circuit, the only other court of appeals to have decided the issue,” it held the IRS can assess the penalties.
• September 8, 2026: The Supreme Court extended the deadline for Mr. Safdieh to file a petition for certiorari to November 23, 2026.

For Illinois taxpayers, appeals go to the Seventh Circuit, which as of this writing has not ruled on the question, so the Tax Court’s reading still technically applies in a Collection Due Process case here. In practice, that matters less than it sounds, because a CDP hearing is the only route these penalties take to the Tax Court, and that route has its own limits (see below). I wouldn’t build a plan around the Farhy argument. It’s worth preserving if your facts fit, but reasonable cause and a clean filing are where most of the work gets done.

How to Appeal a Form 5471 Penalty

If the IRS denies your request, you generally have 30 days from the rejection letter to ask for an appeal. The IRS’s penalty appeal page says to check your letter for the exact deadline.

The options, in the order they usually come up:

• Respond to the notice. Send the reasonable cause statement, signed under penalties of perjury, with the supporting documents. Keep copies and proof of mailing.
• Request an Appeals conference. The IRS Independent Office of Appeals reviews the denial separately from the office that assessed the penalty.
• Collection Due Process. If the IRS moves to levy or files a lien, you can request a Collection Due Process hearing. You can challenge the penalty itself at the hearing only if you never had an earlier chance to take it to Appeals. Under the Treasury regulations, an Appeals conference offered in the penalty letter counts as that chance even if you didn’t use it, which is one more reason not to let the 30-day window pass.
• Pay and claim a refund. You can file Form 843 and then sue for a refund if the claim is denied.

The IRS takes the position that Section 6038 penalties are assessed without a notice of deficiency, so you don’t get the usual chance to go to the Tax Court before paying. The National Taxpayer Advocate notes these penalties are generally subject to judicial review only after you pay and sue in a U.S. district court or the Court of Federal Claims. That’s why the administrative steps, the statement and the Appeals conference, carry so much weight.

Interest follows the penalty. The IRS says on its penalty page that it cannot remove or reduce interest unless the penalty is removed or reduced.

Missing Forms You Haven’t Been Asked About Yet

If the IRS hasn’t contacted you, file the missing forms now through the right procedure, with a reasonable cause statement for each one. Waiting keeps the statute of limitations open and lets more penalty years pile up.

The IRS’s Delinquent International Information Return Submission Procedures are for taxpayers who aren’t under a civil examination or criminal investigation and haven’t already been contacted about the missing returns. Forms 5471 are attached to an amended income tax return, and you may attach a reasonable cause statement to each delinquent form.

The IRS also says penalties “may be assessed in accordance with existing procedures,” and may be assessed during processing without considering the attached statement. Forms 3520 and 3520-A get advance review of the statement; Form 5471 does not. You may still get a notice, and then you respond with the statement you already prepared.

If the missing Form 5471 sits alongside unreported income, the procedure changes. That’s when the Streamlined procedures or the IRS Voluntary Disclosure Practice may fit better. Our comparison of IRS offshore amnesty programs explains which applies when.

What to Do If You’re Facing a Form 5471 Penalty

The data is better than most people expect. Systemically assessed Section 6038 and 6038A penalties were abated at high rates from 2018 through 2021, and a well-built reasonable cause statement is the piece that gets that done. Here is the order I’d follow.

• Talk to a tax attorney before your accountant writes anything. Communications with a CPA or enrolled agent are protected under 26 U.S.C. § 7525 only in noncriminal tax matters. Because the Form 5471 instructions list possible criminal penalties, have an attorney assess your facts before anyone writes a statement under penalties of perjury.
• Inventory every year and every entity. List each foreign corporation, your ownership and role in each year, and which forms were filed. Penalties run per form, so the full picture sets the strategy.
• Gather the records. Ownership documents, the foreign company’s financial statements, prior returns, and every communication with your preparer about the foreign interest.
• Fix all years before asking for relief. The IRS manual recommends not considering reasonable cause until all delinquent returns are filed.
• Write the statement as a dated chronology. Facts, dates, and documents. Sign it under penalties of perjury.
• Track every deadline. The 90-day clock after an IRS notice drives the continuation penalty, and the 30-day appeal window after a denial is short.

For broader penalty strategy, see our guides to IRS penalty abatement and Form 3520 penalty abatement, which follows a similar process for foreign gift and trust penalties.

Facing a Form 5471 Penalty? Let’s Talk.

Tax software doesn’t ask whether you own part of a foreign company, and many preparers who handle domestic returns never see the foreign side of a business. A penalty notice is usually the first sign something was missed.

At Gordon Law Group, our tax attorneys and the accountants at Gordon Tax work as one team. The attorneys protect your communications under attorney-client privilege and build the reasonable cause case; the accountants prepare the delinquent forms and amended returns. Gordon Law Group was founded in 2012 by Andrew Gordon, a tax attorney and CPA, and international tax compliance is a core part of our practice.

Every case depends on its facts. A confidential conversation can sort out which of these options fit yours.

Schedule a confidential consultation and let’s talk through your notice.