U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations may well be responsible for filing Form 5471.
What is Form 5471?
Americans living abroad might be required to file the 5471 form with US expatriate tax return form 1040. Form 5471 is an information return for U.S. persons with respect to certain controlled foreign corporations.
Whether you are a US citizen or US green card holder living in the United States, you are living overseas (and even qualify for the Foreign Earned Income Exclusion), or own at least 10% of a foreign corporation you have to file Form 5471.
The requirement to file IRS Form 5471 is not to do with tax. Form 5471 is an informational return, not a tax return. The IRS utilizes Form 5471 to have a record of which US persons own foreign corporations. The goal is to safeguard against people trying to hide their assets from the IRS. The form itself does not lead to any obligations to pay the US government (apart from penalties for failing to file or incorrectly filing the form).
Form 5471 Filing.
The Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is an information return that must be filed alongside your regular form 1040. This applies to U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations. Form 5471 is used to report the activity of the foreign corporation. Though 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.
Certain types of income (called Subpart F Income) may be taxed and flow through to US shareholders. This would cause them to pay tax on that income on US personal tax returns. The rules for determining which types of income are considered Subpart F are somewhat complex. Any types of corporate income such as dividends, interest, rental income, insurance income, offshore shipping income and personal service income under certain conditions may be treated as Subpart F income. Subpart F income is taxable on the US shareholder’s personal 1040 tax return (or corporate return if a US corporation is the owner) in the year it occurs as ordinary income. This happens even if the income was distributed. Dividends paid to shareholders of Foreign Corporations are occasionally eligible for reduced qualified dividend rate (same rate as capital gains) when paid from the foreign corporation that is located in a country with which the US has a tax treaty.
Failure to file Form 5471 results in a penalty (and not a tax). NOLs would not offer any protection. The three-year statute of limitations that applies to normal tax returns does count until Form 5471 is properly filed. This is because failure to file Form 5471 renders the personal tax return as incomplete at the time of original filing.
Form 5471 Filing Requirements.
The filing requirements for Form 5471 apply to persons who have a certain level of control in some foreign corporations. Form 5471 is required 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. The category of filers can be overwhelming. 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 challenging 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. Substantial penalties exist for U.S. citizens and U.S. residents liable for filing Form 5471 and failing to do so. There is help. Use the IRS Streamlined Disclosure Program for incorrect or missing Forms 5471.
Form 5471 Filing Deadline.
The Form 5471 filing is attached to your individual income 1040 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. Persons can be subject to a substantial penalty of $10,000 or more for each year the form is not filed. Additional penalties of up to $50,000 are charged for instances of continued failure. Any person who fails to file or report all 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. Criminal penalties may apply for failure to file the required 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 of all, if the form is not filed, your Form 1040 would be considered being non-filed by the IRS leaving your individual return open for audit and penalties indefinitely.
Form 5471 Filing Instructions.
Form 5471 Instructions can be a bit daunting. That is because the IRS has made Form 5471 Instructions unnecessarily complex, especially in just trying to determine the different Categories of Filers — and who, and what schedules needs to be filed.
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. Consequently, 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 as soon as possible 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 amplify its efforts in the future. Additionally, many US-Foreign Country tax treaties 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.