U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for Form 5471 filing.
Form 5471 Filing
Form 5471 filing is a filing requirement and an information return that is applicable to U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations to report the activity of the foreign corporation. Although it is only an information return, accurate completion is essential as it is an important IRS tool for determining companies that need to be audited or are subject to Subpart F income.
If you own more than fifty percent of a foreign corporation, you now have to plan for the new GILTI tax (global intangible low-taxed income). The Tax Cuts and Jobs Act (TCJA), passed in December 2017 made significant changes in the tax law that apply to shareholder’s of foreign corporations and required the creation of the IRS Form 8992 as well as a revision of Form 5471. This has drastically and fundamentally changed how controlled foreign corporations (CFCs) will operate abroad.
Under the TCJA, new rules requiring the inclusion of global intangible low-taxed income (known as “GILTI”) generated by controlled foreign corporations (CFCs) were added under Section 951A and related sections of the Internal Revenue Code (IRC). The inclusion essentially aims to tax U.S. shareholders on their allocable share of earnings from a CFC, to the extent that the earnings exceed a ten percent return on tangible assets allocated to the U.S. shareholder.
Now it is probable if there is a profit you will have to pay tax on the profits remaining at year end in your foreign corporation. To learn more, check out our article on Form 8992 and the GILTI Calculation.
Form 5471 Filing Requirements
The filing requirements for Form 5471 relate to persons who have a certain level of control in certain foreign corporations. Form 5471 is required to be filed in the following situations:
- U.S. person becomes a director or officer of a foreign corporation
- U.S. person acquires an ownership interest in a foreign corporation in excess of the prescribed limits
- U.S. person disposes of stock in a foreign corporation that reduces his or her interest in the foreign corporation to less than the prescribed limits
- U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year
- U.S. person 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.
In determining the ownership interest, the complex rules of direct, indirect, and constructive ownership come in to play as well. Not only that, the category of filers can get confusing, The categories are used to determine which schedules, statements and/or other information must be included as part of the Form 5471 filing. To say that the Form 5471 filing instructions are complex and difficult to understand would be an understatement.
The form and attached schedules are used to 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. citizens and U.S. residents who are liable for filing Form 5471 and who failed to do so.
Form 5471 Filing Deadline
The Form 5471 filing is attached to your individual income tax return and is to be filed by the due 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 and it’s an important form to file because if you fail to file the form and were required to file the form you can be subject to a substantial penalty $10,000 or more for each year.
Additional penalties of up to $50,000 are charged 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. Continued cases of failure are also subject to additional reductions.
In addition, criminal penalties may also 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.
While in the past, it was not very common to receive a response about a Form 5471 filed late. However, more and more we are hearing about taxpayers that have submitted their own self-prepared Form 5471 being assessed an automatic $10,000 penalty for each year filed late or incomplete.
Last but not least, if the form is not filed, your Form 1040 would be considered to be non-filed by the IRS leaving your individual return open for audit and penalties indefinitely. This is a dream come true for the IRS.
Form 5471 Filing Instructions
The instructions to Form 5471 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, 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 US generally accepted accounting principles (U.S. GAAP) which generally differ from those used to produce foreign financial statements. So, there is some work required in converting financial statements to the required format.
If you own part or all of a foreign corporation, and have not done your form 5471 filing, you should start filing it immediately to avoid the $10,000 penalty. While in the past it has been difficult to secure ownership information on foreign corporations, in the future it will become easier. The IRS is actively involved in securing more information of US citizens finances overseas through FACTA and other methods, and will only increase its efforts in the future. And, of course, there are many US-Foreign Country tax treaties that provide for complete cooperation between the two nations with respect to 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 Form 5471.
What Is The Form 5471 Used For?
What Is The Form 5471 Used For? The Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to 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 is described in more than one filing category, do not duplicate information. However, complete all items that apply. For example, if you are the sole owner of a controlled foreign corporation (CFC) (i.e., you are described in Categories 4 and 5), complete all four pages of Form 5471 and separate Schedules J and M. A separate Form 5471 and all applicable schedules for each applicable foreign corporation.
Be sure to read the information for each category carefully or engage with a tax expert to determine which schedules, statements, and/or information apply. The Form 5471 Instructions, unfortunately, are very complex and unclear when it comes to the Form 5471. In our opinion, the instructions should not be used as a step-by-step guide on how to prepare the Form 5471 (unlike the Form 1040 instructions) as the instructions are neither comprehensive or complete with all necessary details to properly and completely prepare the Form 5471.
How Do I File The Form 5471?
How Do I File The Form 5471? The Form 5471 is attached 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 attached Form 5471 must be filed by the due date (including extensions) for that return.
Do I Have To File The Form 5471 Annually?
Do I Have To File The Form 5471 Annually? When a U.S. person is required to file a 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 frequency and timing of when the Form 5471 must be filed. For example, a Category 5 Filer must file the Form 5471 every year.
What Is A CFC?
What Is A CFC? A CFC Is a Controlled Foreign Corporation. CFC rules are features of an income tax system designed to limit the deferral of tax by using foreign entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity.
What Is Subpart F Income?
What Is Subpart F Income? Subpart F income is one of these exceptions designed to limit the deferral of U.S. income taxes. Subpart F income only applies to Controlled Foreign Corporations (CFC’s). 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, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.