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
The Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is in an information return that must be filed by 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.
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
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.
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.
For more information about the Foreign Corporation information return, please read more in the IRS instructions for the Form 5471.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
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