Here is yet another form you need to file surrounding any foreign accounts or other assets you may own or be associated with. This one deals with foreign corporations. If this speaks to you, keep reading.
If in addition to having an interest in a foreign account, you own an interest in a foreign entity, then this chapter applies to you. You may be obligated to file Form 5471 — Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
The rules for 5471 can be somewhat complicated, and you should determine whether or not you may fit in the category of individuals who have an obligation to file. The due date is April 15 for individuals and March 15 for corporations.
In this chapter, I go into depth about Form 5471, who must file it and what happens if you fail to do so. If you have any questions after you have digested this, call me and I can help you figure it out.
Who Must File Form 5471
There are five categories of individuals or entities that are required to file Form 5471:
- GILTI (Global Intangible Low-Taxed Income) applies to 10 percent U.S. shareholders of a controlled foreign corporation (CFC) to include in current income the shareholder's pro rata share of the GILTI income of the CFC. The GILTI rules apply to C corporations, S corporations, partnerships and individuals.
- Officer or director if there have been changes of certain 10 percent in ownership by a U.S. person
- U.S. shareholders with certain 10 percent ownership changes in their own holdings, individuals treated as U.S shareholders under section 953(c), or those who become U.S persons at the time they reach 10% stock ownership (as defined below).
- A U.S. person who has control in a CFC for 30 days;
- An owner of 10 percent or more of a CFC who owns stock for an uninterrupted period of 30 days or more during the tax year and who also owned that stock on the last day of the year.
One example that would trigger an obligation to file a Form 5471 is if a corporation has had more than a 10 percent change in ownership. However, there are categories which apply to officers of a corporation as well so you may want to look further to determine whether your particular circumstances require you to file.
As established at the beginning of this book, the definition of U.S. person is meant to include U.S. citizens, residents, partnerships, corporations and estates or trusts. See 26 U.S. Code § 7701(a)(1). For the category of Form 5471 filers who have control of a CFC, the definition of “U.S. persons” also includes people who started the beginning of the year as nonresident aliens but become residents later in the year and are married to a U.S. resident or citizen. (See Instructions for Form 5471).
Controlled Foreign Corporation
A foreign corporation will be considered a CFC if “more than 50 percent of its voting power or value is owned by U.S. Shareholders.” (See Determination of U.S. Shareholder and CFC Status, 4; see also 26 U.S. Code § 957(a)).
Ten Percent Stock Ownership
Furthermore, the ten percent stock ownership is calculated based on the total value of the corporation’s stock or the voting power of all the corporation’s classes of stocks combined. Id.
A person in “control” is defined as a person who either has more than 50% of the voting power of all the voting classes, combined, OR has more than 50% of the total value of shares across all the corporation’s classes of stock. Id.
Form 5471 Penalties
The form must be submitted with the taxpayers’ tax return and a separate form must be completed for each foreign company for which it is applicable. Inactive and dormant corporations are not exempt from filing this form, although dormant corporations may elect a summary procedure to fulfill the filing requirement.
One piece of advice that we give to our clients is if they are unsure whether or not they need to file a 5471, to just file it. The penalties are too onerous.
- $10,000 per foreign corporation plus a $10,000/month continuation penalty to a maximum of $50,000 (total penalty of $60,000). While taxpayers may present a reasonable cause defense for the failure to file, the IRS will not accept such a defense to reduce any continuation penalties that accrue because the taxpayer would have been deemed to have notice.
- If the IRS decides to audit, it is not unusual for them to go 10-15 years back
- If there are multiple foreign entities where the client needs to file, and the client receives multiple penalties for each, then the total penalties can be astronomical
Remember, failing to file a required disclosure form that is attached to your 1040 form can mean that the statute of limitations will be open indefinitely — not just for the form, but for the entire tax return. See I.R.C. Section 6501(c)(8).
If after reading this chapter you believe that you need to file a Form 5471, I strongly urge you to call me. Once we start getting into some of the more complex forms such as the 5471, it can get overwhelming for the taxpayer to try to figure out on their own.
The failure to file a 5471 can result in very costly penalties. Even worse, you could get audited. That is why I actually advise my clients to “when in doubt, file.” Usually, I take the stance of only giving the IRS the information they request … nothing more. However, this is a case where it is better to offer more than they may need to prevent them knocking on your door later.
If you are ready to take the next step towards getting your filing in order, give me a call to arrange a consultation. The IRS does not take international tax matters lightly and neither should you.