IRS Filing Requirements & Penalties Related to International Boycotts
Taxpayers that directly or indirectly do business with a country participating in an international boycott are required to file IRS Form 5713, International Boycott Report. This requirement covers two main situations:
- When a taxpayer directly or indirectly doing business with a government, company or national agrees to refrain from any of the following:
- Operations with or in the boycott country
- Operations with U.S. persons engaged in business in the boycott country
- Operations with companies owned or managed by or hiring persons of a certain nationality, race or religion
- Shipping goods on carriers owned or managed by persons not participating in such boycotts
- When a taxpayer directly or indirectly performs operations for, with or on behalf of a person located in a country currently participating in an international boycott
For a person to be considered as participating in a boycott, there must be an active oral or written agreement by the taxpayer to explicitly refrain from transactions with boycotted parties. IRS determinations on whether a particular operation or taxpayer constitutes participation in or cooperation with an international boycott can be requested pursuant to Rev. Proc. 77-9. Taxpayers are not required to report U.S.-approved boycotts via Form 5713.
Countries currently listed include Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.
The term “doing business” for purposes of Form 5713 is quite broad. It requires all taxpayers and certain related parties conducting operations or otherwise doing business in/with a boycotting country to file Form 5713 in the year in which the activity occurred. The term “operations” for purposes of the filing requirement encompasses any form of business or commercial activity, whether or not it’s income-producing. This includes operations not conducted in a boycotting country but merely performed on behalf of one. For example, a Form 5713 is necessary in circumstances where a company sells products to a corporation residing in a boycotting country or owning a warehouse in a boycotting country. Not only would the direct parties be required to report these types of operations via Form 5713, but certain related or affiliated parties also would be required to file. These include members of the taxpayer’s controlled group, a U.S. shareholder of a foreign corporation, a partner in a partnership or a person treated as owner of a trust having operations in a boycotting country.
If a person participates in or cooperates with an international boycott in any form, as provided above, all operations of that person and their affiliates are considered in violation of Internal Revenue Code Section 999 and the person and their affiliates are required to file Form 5713. Penalties for such violations include reduction in the taxpayer’s foreign tax credit, increase in Subpart F income to controlled foreign corporations and/or reduction in benefits allowed to foreign sales corporations and their shareholders. The amount of such penalties generally is computed using an international boycott factor; in this factor, the numerator equals the taxpayer’s operations in boycotting countries and the denominator equals its total foreign operations. Penalties also are assessed with respect to the benefits of an interest charge domestic international sales corporation (IC-DISC) where an IC-DISC makes qualifying export sales to a boycotting country. In such cases, although the sales are still considered qualified export sales, the IC-DISC is deemed to distribute as a dividend any income resulting from the sales to a boycotting country. The IC-DISC shareholder must recognize this amount as a deemed dividend. In addition to the above penalties, if it’s determined a Form 5713 filing is required and the taxpayer is deemed to have willfully failed to file, the taxpayer may be assessed fines of up to $25,000 or a prison term not to exceed one year, or both.
To complete Form 5713, paper-filing taxpayers should attach the form to their annual income tax return and mail a duplicate copy to the Internal Revenue Service Center in Ogden, Utah. Electronic filers only are required to attach Form 5713 to their tax return; they don’t need to provide a separate duplicate copy.
If you feel you may have a Form 5713 filing requirement or would like additional information, contact your BKD advisor.