In August, 2008, the Internal Revenue Service began issuing letters to some taxpayers to alert them to an upcoming procedural change relative to the automatic assessment of penalties. These letters were issued to taxpayers who may not have timely filed their corporate return and/or not timely filed their Forms 5471.

IRC Section 6651(a)(1) provides a penalty for the failure to file income tax returns (Form 1120) by their due date (including extensions). The penalty is 5% of the tax required to be shown on the income tax return for each month (or fraction thereof) during which such failure continues. The amount of the penalty shall not exceed 25%. No penalty is applicable under IRC Section 6651(a)(1) if no underpayment of tax is shown on the return.In addition, a separate penalty may apply to each Form 5471 which is filed after the due date of the income tax return.

This penalty will apply whether or not any tax is due on Form 1120. IRC Section 6038(a) requires information reporting with respect to certain foreign corporations (Form 5471) and describes the information required to be reported on this form. IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).IRC Section 6038(c) provides for a 10% reduction of the foreign taxes available for credit under IRC Sections 901, 902 and 960. Per IRC Section 6038(c)(3), this reduction to the foreign taxes can be applied in addition to the monetary penalty.

Beginning January 1, 2009, the Internal Revenue Service Center will automatically assert appropriate penalties on late filed Forms 1120 with Forms 5471 attached. Taxpayers are encouraged to submit delinquent Forms 5471 for past income tax periods prior to January 1, 2009. For those taxpayers who are required to electronically file their income tax return under Treasury Decision 9363, they are also required to e-file any amended returns for tax years 2006 and 2007.

Similarly, these taxpayers may voluntarily e-file an amended return for the tax year 2005. For those taxpayers who are submitting amended/delinquent Forms 5471 and wish to submit a Reasonable Cause statement with their filings, the Service recommends the following procedures.

Amended Forms 5471 Filed Pre January 1, 2009

For those taxpayers who are filing these amendments on paper, please submit your returns to the Campus in which you regularly file your income tax return. For those taxpayers who are required to electronically file, they may submit a Reasonable Cause statement attached to their return in a PDF format. Please name this file “ReasonableCause5471.pdf” and describe it as “Reasonable Cause 5471. Attach the PDF to the top level consolidated return

Amended Form 5471 Filed Post December 31, 2008

• If filed with Forms 1120

For both paper filed and e-filed returns, it is recommended that taxpayers do not submit a Reasonable Cause statement until contacted by the Service that penalties are proposed relative to the Forms 5471.

• If filed with other than Forms 1120

Continue filing as stated above for Pre January 1, 2009.