Failure To Report Sales In Boycotting Countries Can Bring Significant Tax Penalties

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Image of container ship bringing imports to a boycotting countries

The U.S. discourages any U.S. persons* from participating in, or cooperating with, international boycotts not approved by the U.S. government.

If a U.S. person participates in such a boycott, they may lose certain tax benefits, such as tax deferral of IC-DISCs or foreign tax credits. Taxpayers doing business with companies located in boycott countries must file Form 5713, International Boycott Report, or risk being subject to substantial penalties.

Currently, nine countries are boycotting Israel. This prohibited economic boycott is the one most likely to affect U.S. taxpayers.

Which countries are boycotting Israel?

  1. Iraq
  2. Kuwait
  3. Lebanon
  4. Libya
  5. Qatar
  6. Saudi Arabia
  7. Syria
  8. United Arab Emirates
  9. Republic of Yemen

 

How does this affect my business?

If your business has operations in, or in relation to these nine countries, you may be subject to additional reporting related to those operations.

Operations refer to all forms of business and commercial activities done in a boycotting country. Examples include sales, purchases, leases, transportation, construction, manufacturing, and more.

Sales of any goods or services intended for use in a boycotting country are also considered operations and are subject to reporting. If you know or have reason to know, that specific goods or services are for use in a boycotting country, those sales may also be required to be reported – even if they occur outside of a boycotting country.

Additionally, you may be subject to Form 5713 reporting requirements:

  • If your company has foreign affiliates doing business in boycott countries, or
  • If you’re a partner in a partnership that’s required to file Form 5713, but it doesn’t.

 

Penalties

Failure to file Form 5713 could result in penalties of $25,000 per failure, one year of imprisonment, or both.

If you have international operations in any boycott country, be diligent about meeting the reporting requirements. The IRS takes reporting of transactions with boycotting countries very seriously. It has shown limited flexibility for waiving monetary penalties.

When preparing your tax returns, provide your tax return preparer with a sales-by-country report. Even if sales in a boycott country are minimal, Form 5713 should be prepared.

 

*A U.S. person is defined as a citizen/resident, domestic corporation, domestic partnership, or domestic estate/trust.

 

Have questions about your reporting requirements? Let’s talk!