Form 5471

U.S. citizens and U.S. residents, officers, directors, or shareholders in certain foreign corporations are responsible for IRS Form 5471 filing.

Tax Year 2023 Form 5471 Filing

Tax year 2023 Form 5471 filing is a filing requirement and an information return that applies to U.S. citizens and U.S. residents, officers, directors, or shareholders in certain foreign corporations to report the foreign corporation’s activity.

Although it is only an information return, accurate completion is essential. Hence, it is a crucial IRS tool for audit selection and determining whether the company is subject to Subpart F or GILTI.

If you own more than half of a foreign corporation, you now must plan for the new GILTI tax. Also known as Global Intangible Low-Taxed Income.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made significant tax law changes that apply to foreign corporations’ shareholders. It required the creation of the IRS Form 8992 and a revision of the 5471 IRS form. This has drastically and fundamentally changed how controlled foreign corporations (CFCs) will operate abroad.

Under the TCJA, new rules requiring the inclusion of GILTI for controlled foreign corporations (CFCs) were added. The new rules are in Section 951A and other sections of the Internal Revenue Code (IRC). The inclusion aims to tax U.S. shareholders on their allocable share of earnings from a CFC. This is to the extent that the earnings exceed a 10% return on tangible assets allocated to the U.S. shareholder.

It is probable if there is a profit, you will have to pay 5471 tax on the profits. To learn more, check out our article on Form 8992 and the GILTI Calculation.

Form 5471 Filing Requirements

Determining who must file Form 5471 can be a challenge in itself. The filing requirements for the 5471 form relate to persons who have a certain level of control in certain foreign corporations.

So, the answer to who must file Form 5471 is that it may apply in the following situations if a U.S. person:

  • Acquires an ownership interest in a foreign corporation above the prescribed limits
  • Disposes of stock in a foreign corporation that reduces his or her interest in the foreign corporation to less than the prescribed limits
  • Is in control of a foreign corporation for an uninterrupted period of at least 30 days a year
  • Is a 10% or more shareholder in a foreign corporation that is a “controlled foreign corporation” for an uninterrupted period of at least 30 days in a year. And that person owns that stock on the last day of the year.
  • Organization or reorganization of the foreign corporation

In determining the ownership interest, the complex rules of direct, indirect, and constructive ownership come into play. Not only that, the category of filers can get confusing. Categories determine which 5471 schedules, statements and/or other information to include as part of the new Form 5471 filing. To say that the Form 5471 filing instructions are complex and difficult to understand would be an understatement.

The form and schedules satisfy the reporting requirements of transactions between foreign corporations and U.S. persons under sections 6038 and 6046 of the Internal Revenue Code. Substantial penalties exist for U.S. taxpayers who are liable for taxpayers who must file 5471 and who failed to do so. The Form 5471 requirements apply even if the corporation conducted no business.

Form 5471 Filing Deadline

The Form 5471 filing is an attachment to your individual income tax return. It must be filed by the deadline date (including extensions) for that return.

IRS Form 5471 Penalties – What Happens if You Don’t File Form 5471 On Time?

What Happens if You Don’t File Form 5471 On Time? Penalties for the failure to file a Form 5471 can be very steep. It’s an important form to file. If you fail to file the form, you can be subject to a substantial penalty of $10,000 or more each year.

Additional penalties of up to $50,000 can apply for instances of continued failure. Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit. Also, continued cases of failure are also subject to additional deductions. 

Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902, and 960. If the failure continues 90 days or more after the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired.

Criminal Penalties

Also, criminal penalties may apply for failure to file the requisite information. If you are directly or indirectly involved in a foreign corporation in any of the ways discussed above, we advise you to contact us to determine if you have any filing obligations.

It was not very common in the past to receive a response about a Form 5471 filed late. However, more and more, we are hearing about taxpayers that have self-prepared their Form 5471 being assessed an automatic $10,000 penalty for each year filed late or incomplete.

Last but not least, if you don’t file the form, the IRS would consider Form 1040 “non-filed” and open for audit and penalties. A dream come true for the tax collectors.

2023 Form 5471 Instructions

The 2023 Form 5471 instructions state that it could take over 32 hours to complete this form.  The form requires that you supply the IRS with the corporation’s income statement, balance sheet, earnings and profits balances, and data on its loans, operations, and other shareholders.  It also requires information on dividends and managerial payments made to shareholders, officers, and directors.

The financial information must be presented using the US generally accepted accounting principles (U.S. GAAP), which typically differ from those used to produce foreign financial statements. So, there is some work in converting financial statements to the necessary format.

If you own part or all of a foreign corporation and have not done your form 5471 filing, then you should start filing it immediately to avoid the $10,000 penalty. While in the past, it has been challenging to secure ownership information on foreign corporations. Nowadays, it has never been easier for the IRS to obtain. The IRS is actively working on securing more information on US citizens’ finances overseas through FACTA and other methods. And the IRS will only increase its efforts in the future.  For example, many US-Foreign Country tax treaties provide for complete cooperation between the two nations. This includes the exchange of tax information on citizens domiciled in each.

What People Ask About The Form 5471

Below are common questions and answers that people ask about the 5471 form.

What Is The Purpose of The Form 5471?

What Is Form 5471 Used For? Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is a required disclosure for certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules satisfy the reporting requirements of sections 6038 and 6046 and the related regulations.

Who Must File The Form 5471?

Who Must File The Form 5471? Generally, all U.S. persons described in Categories of Filers must complete the schedules, statements, and/or other information requested. Please see our article What Is Form 5471 to learn more about the different Categories of Filers.

If the filer has more than one filing category, do not duplicate information. However, complete all items that apply. If a filer owns multiple corporations, a separate Form 5471 and all applicable schedules for each applicable foreign corporation is necessary.

Be sure to read the information for each category carefully or contact a tax expert to determine which schedules, statements and information apply. The Form 5471 Instructions, unfortunately, are very complex and unclear when it comes to Form 5471. In our opinion, the instructions are unreliable as a step-by-step guide on how to prepare Form 5471 (unlike the Form 1040 instructions) as the instructions are neither comprehensive nor complete with all necessary details to thoroughly and adequately prepare Form 5471.

How Do I File The Form 5471?

How Do I File The Form 5471? Form 5471 is an attachment to your individual income tax return (aka “the Form 1040”) or, if applicable, a domestic partnership, corporation, or exempt organization return.

Both the tax return and the Form 5471 attachments must be filed by the due date (including extensions) for that return.

Do I Have To File Annually?

Do I Have To File The Form 5471 Annually? When a U.S. person must file an IRS Form 5471 (an information return) under IRC 6046(a), it is filed by attaching it to an individual income tax return, a partnership return, a corporation return, an estate return, or a trust return. The Category of Filer(s) will determine the Form 5471 filing requirements’ frequency and timing. For example, a Category 5 Filer must file IRS Form 5471 every year.

What Is A CFC? CFC Filing Requirements

What Is A CFC? A CFC Is a Controlled Foreign Corporation. CFC rules exist to limit the deferral of tax by using foreign entities. The laws are applicable only concerning the income of an entity that is not currently taxable to its owners.

What Is Subpart F Income?

What Is Subpart F Income? Subpart F income is one of these exceptions to limit the deferral of U.S. income taxes. Subpart F income only applies to Controlled Foreign Corporations (CFCs). A CFC is a foreign corporation in which U.S. persons own more than 50 percent of the corporation’s stock (measured by vote or value).

What Is Section 965?

What Is Section 965? Section 965 of the Code requires U.S. shareholders to pay a transition tax on the “untaxed” foreign earnings of certain “specified” foreign corporations as if there was the repatriation of those earnings to the United States.