Heads Up PE: IRS Highlights Criminal Penalties for Willful Failure to File
An important heads up for private equity and portfolio companies — the IRS has updated the instructions to Forms 8858, 8865, and 5471 to emphasize criminal penalties may apply to U.S. persons for willful failure to file such forms. Criminal penalties may be imposed in addition to the civil penalties applicable to failure to include these forms with a U.S. federal income tax return when required.
The Internal Revenue Code provisions outlining the potential criminal penalties applicable to willful failure to file include:
- IRC §7023 — If the failure to file is determined to be willful, the criminal fine would be up to $100,000 as well as potential imprisonment of up to one year. Additionally, costs of prosecution would be imposed upon the non-filer.
- IRC §7206 — Because a U.S. persons signs a U.S. federal income tax return under penalties of perjury, signing the return with knowledge of the filing requirement may be considered the willful filing of a false return. A finding that a U.S. person willfully made a false statement or false return could result in conviction of a felony and carries with it potential fines of $500,000 as well as imprisonment of up to three years. Again, costs of prosecution would be borne by the non-filer.
- IRC §7207 — This section imposes additional penalties for fraudulently filed returns in cases where the filer is aware the return is false as to a material matter. The potential criminal penalties could include a fine of $50,000 as well as potential imprisonment of up to one year.
Owners of U.S. businesses should be mindful that exposure related to failure to file could have an adverse impact on acquisitions and dispositions of U.S. companies with foreign corporate subsidiaries, foreign partnerships, and foreign branches or disregarded entities. Any such exposures could result in a reduction in purchase price, broader indemnification terms, or both.
U.S. investors may want to coordinate with the U.S. tax advisors of their investments to confirm any such filing requirements have been properly identified and reported where required. Contact us if you need assistance.
Written by Jill Boland
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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