December 11, 2007

IRS Issues Private Letter Ruling Explaining When $10,000 Penalty may be Waived for Failing To File Form 5471

1. Form 5471 Penalty

   IRS Form 5471 must be filed by certain US citizens and US residents that have a prescribed type of involvement with a private Canadian (or other non-US) corporation. The penalty for failure to file by the due date is $10,000 annually per corporation. The IRS recently issued a private letter ruling providing guidance on when the penalty would be forgiven. (See PLR 200748006).

   The taxpayer must establish that the failure was due to "reasonable cause". Reasonable cause is based on all the facts and circumstances. However the IRS has indicated "relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations."

2. Foreign Athletes and Entertainers Performing in the US

   The IRS has launched an "Issue Management Team" that will focus on the US tax payment compliance by foreign athletes and entertainers who work in the United States. The initial focus will be on those athletes and entertainers engaged in tennis, golf, and music.

3. Nexus in Alabama

   An out-of State business that rented caps and gowns in Alabama with the assistance of an Alabama company had nexus in Alabama for Alabama sales tax purposes.

4. Estate Tax Relief

   Two more proposed sets of estate tax relief were introduced on November 15th. H.R. 4235 increases the "applicable exclusion amount" to $3 million effective with the date the legislation is enacted. H.R. 4242 increases the "applicable exclusion amount" to $3.5 million ($3 million in the case of deaths before 2009) and is effective for deaths after December 31, 2006.

5. US Immigration Legislation

   Proposed US immigration legislation has been introduced (S. 2368) which, among provisions, could a) provide for up to ten years imprisonment for a person who recruits an individual to enter the US knowing that such person lacks lawful authority to do so, and b) require all employers to verify through the E-Verify System that each individual that is hired is authorized to work in the United States.

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