Substance Matters

The IRS has decided to play Yente.

At the recent LMSB Financial Services industry seminar in New York City, Kathy Robbins, LMSB field operations director (financial services industry) and Stuart Mann, Program Director for Withholding Taxes, noted that cross-border payments and compliance related to those payments will continue to be an area of emphasis and may well become a national program.

A subgroup of IRS personnel is working to develop a matching program for Form 5471 filings and annual Form 1042 filings to cross-reference this information to ensure that proper reporting with respect to Form 1042 has occurred. It also appears that the Form 5471 information will continue to be relevant in other areas as well, such as with respect to transfer pricing documentation. LMSB examiners have often found “gaps” in the information reported on Form 5471 and the taxpayer’s transfer pricing documentation under Section 6662. Thus, taxpayers and their advisors are well advised to review the content of their Forms 5471 filings with their Form 1042 filing and their transfer pricing documentation to ensure that there is consistency in this information.

Bear in mind that there are legitimate reasons for inconsistencies between amounts reported on Forms 5471 and Form 1042 and what is included in the taxpayer’s transfer pricing documentation. For example, transfer pricing documentation includes all intra-group transactions, not just U.S. sourced-fixed, determinable, annual or periodic income (“FDAP”) paid to non-U.S. persons – what is reported on Form 1042.

Given the IRS’ recent success with its withholding efforts and the fact that withholding is now a tier-I LMSB initiative, taxpayers and their advisors would be well advised to consider reconciling the information on Forms 5471/5472 with the information contained in their transfer pricing documentation, as unaccounted for items on Forms 5471/5472 may give rise to penalty exposure in the event of an adjustment on examination.