Form 5471

Form 5471

Form 5471

Form 5471 is required by US Person Shareholders, Directors, and Officers of International/Foreign Corporations who have an ownership interest or control in the entity. The requirements of reporting foreign corporations and other entities fall under Internal Revenue Code sections 6038 and 6046. There are five (5) main categories of filers with ownership in a foreign corporation — and it is not limited to Controlled Foreign Corporations either — which is another common misconception. The reporting is not determined by whether any income was generated or if the business turned a profit.  Unlike other international reporting forms such as the FBAR and Form 8938, Form 5471 is a very comprehensive international tax form. The form is complicated and requires a firm understanding of tax and accounting principles such as assets, liabilities, income, and equity, as well as Subpart F and other more complicated international tax components — such as GILTI and FDII. The IRS strictly enforces reporting compliance and routinely issues penalties for non-compliance. We summarize the basics of the 5471 IRS Form below for you.

Purpose of Form 5471

Any U.S. person who meets the threshold requirements for reporting is required to file the form.

Although, one form per corporation is required. So if there are multiple U.S. shareholders, they can all be listed on the same 5471 (usually).

IRC 6038

IRC 6038 refers to: “Information reporting with respect to certain foreign corporations and partnerships”

IRC 6046

IRC 6046 refers to: “Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock.”

Ownership Pre-dated Becoming a US Person

One common situation we come across is when a US person had ownership or interest in a foreign corporation before they became a US person and therefore believe it is not required to be disclosed — but this is inaccurate. Let’s say for example a foreign person owned a 20% ownership in a foreign corporation before becoming a US person.

Then, in 2018, they became a US person  — in 2018 they may have to file a Form 5471, falling under categories 2 or 3 for “acquiring” an interest.

What is a Per Se Corporation?

The IRS has deemed some foreign corporations to be per se corporations. When a corporation is a per se corporation, then the individual cannot disregard the entity. Rather the foreign entity must remain a corporation under US tax law, such as a sociedad anonima.

Form 5471 is Filed when the Tax Return Due

The Form 5471 is due to be filed at the same time the taxpayer files their tax return.

How to File a 5471 Extension

If a taxpayer requires an extension of filing Form 5471, then they would file an extension on Form 4868 for their regular tax return and then the 5471 will go on extension as well.

No 7004 Extension Required

Some forms require the taxpayer to file a Form 7004 in order to request an extension. For example, one common form for international taxpayers that requires the Form 7004 is the 3520- A. The Form 5471 does not require a 7004 to be filed.

Multiple People Reporting the Same Corporation 

Generally, when a person files a Form 5471, the form can be filed as one form per corporation to include all the US shareholders on that form. There are some limitations to using it by multiple people, but for the most part it can be used to reflect all shareholders in the corporation.

*You should speak with your tax professional to determine whether all filers should (or can) submit a copy of it before using this strategy.

GILTI

GILTI Is Global Intangible Low-Taxed Income. The GILTI rules require certain US persons with foreign corporations to pay tax on certain money that they would not otherwise have to pay tax on, prior to the implementation of the TCJA. GILTI applies to CFC and Forms 8992 and schedule I-1 of the Form 5471 are applicable to reporting.

Subpart F

The Subpart F tax regime is used to ensure that certain passive income and other income generated from Controlled Foreign Corporations is taxed in the US. US shareholders may have to pay a tax on their prorated share of current year earnings and profit despite none of the income being actually distributed to the taxpayer. 

Penalties

The penalties for not filing Form 5471 correctly can be tough. They start out at $10,000 and go up exponentially from there — depending on how many Form 5471s a taxpayer may have to file, how late in the year they file, and how many years they are non-compliant. It should be noted that the Form 5472 which is primarily for foreign persons with an interest in US corporations, started at a $10,000 penalty and a few years back jumped up to $25,000 minimum penalty — so enforcement is on the rise.

Automatic Assessed Penalties

In recent years, the Internal Revenue Service has taken to issuing automatic assessed penalties for the failure to file Form 5471. Taxpayers will usually receive a CP-15 notice that identifies the code section and the amount of the penalty. Generally, the taxpayer has 30 days to respond to try to get the penalty waived and time is of the essence.

Reasonable Cause and Amnesty

Just because a person is out of compliance for not filing the form 5471 does not mean they will be penalized. The Internal Revenue Service has developed the various offshore voluntary disclosure tax amnesty programs to assist non-willful taxpayers with safely getting into compliance before penalties are issued. Some taxpayers may qualify for a complete penalty waiver, while other taxpayers are required to pay a much reduced 5% penalty.

If a taxpayer cannot qualify as non-willful, they may still qualify for the voluntary disclosure program although the penalties can be significantly higher.

Categories of Filers (Who is Required to File Form 5471?)

When a US person has certain ownership or control over a Foreign Corporation, they may have a form 5471 filing requirement. There are five (5) different categories of filers — and some of the categories can be further broken down into sub-categories, depending on the specific type of ownership. Let’s go through the basic categories:

Category 1 Filer

      • These categories include a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC) (defined below) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regulations under section 965.

      • However, see Certain Category 1 and Category 5 Filers, later, which may apply.

What does this Mean? This means that — in most scenarios — US individuals who are considered to have 10% or more ownership over a controlled foreign Corporation will have to file Form 5471. There is also requirements for corporations with ownership/interest in other corporations, but for the individual, it is generally for owners of CFCs.

Category 2 Filer

      • This category includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (defined below) has acquired (in one or more transactions):

          1. Stock which meets the 10% stock ownership requirement (described below) with respect to the foreign corporation, or

          2. An additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.

What does this Mean? This generally means when a US Person is an officer or director of a foreign corporation in which a US Person obtains 10% stock of value, then Category 2 requirements kick-in.

Category 3 Filer

      • A U.S. person (see Category 2 Filer above for definition) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described above) with respect to the foreign corporation;

      • A U.S. person who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation;

      • A person who is treated as a U.S. shareholder under section 953(c) with respect to the foreign corporation;

      • A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation; or

      • A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement. For more information, see section 6046 and Regulations section 1.6046-1.

What does this Mean? It generally refers to a US Person who — when they acquire stock or additional stock — have 10% stock ownership in the foreign corporation. Another common scenarios is when a non-US Person has 10% or more and then becomes a US Person in that year.

Category 4 Filer

      • This category includes a U.S. person who had control (defined below) of a foreign corporation during the annual accounting period of the foreign corporation.

What does this Mean? When a US Person (need not be an officer or director) has control of a foreign corporation, then they are required to disclose the information on the Form 5471 under Category 4 Filer.

Category 5 Filer

      • These categories include a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC.

What does this Mean? Essentially, this category is designed to cover all your shareholders who had anytime during the year own stock in a foreign Corporation that qualifies as a CFC. The difference between category 5 and category one is that category one includes SFCs — which is more than just CFC’s.

What is Revenue Procedure 2019-40 

    • Certain Category 1 and Category 5 Filers Rev. Proc. 2019-40 provides relief for certain types of Category 5 filers.

        • This revenue procedure generally provides guidance related to the repeal of section 958(b)(4) of the Internal Revenue Code (“Code”) to certain United States persons within the meaning of section 7701(a)(30) (“U.S. persons”) that own stock in certain foreign corporations.

        • Section 2 of this revenue procedure provides background on section 958.

        • Section 3 of this revenue procedure provides definitions of terms used in this revenue procedure.

        • Section 4 of this revenue procedure provides a safe harbor for determining whether a foreign corporation is a controlled foreign corporation within the meaning of section 957 (“CFC”).

        • Section 5 of this revenue procedure provides a safe harbor for determining certain items, including taxable income and earnings and profits (“E&P”), of a CFC based on alternative information (as defined in section 3.01 of this revenue procedure).

        • Section 6 of this revenue procedure provides a safe harbor for 2 determining certain items of a specified foreign corporation within the meaning of section 965(e) and §1.965-1(f)(45) (“SFC”) based on alternative information.

        • Section 7 of this revenue procedure addresses penalties under sections 6038 and 6662.

        • Section 8 of this revenue procedure describes modifications to be made with respect to filing requirements for Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

        • Section 9 of this revenue procedure provides examples illustrating rules described in this revenue procedure.

        • Section 10 of this revenue procedure provides applicability dates.

        • Section 11 of this revenue procedure provides drafting information. The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) expect to issue other guidance related to certain other consequences of the repeal of section 958(b)(4) separately.

When is Form 5471 Due to be Filed?

Form 5471 is generally due to be filed at the same time the filer’s tax return is due to be filed (including extensions).

What Information is Required to be Included on Form 5471?

There are various levels of reporting, depending on the type of foreign entity and category of Filers. Here are some of the more common schedules for reporting:

Schedule A Stock of the Foreign Corporation for 5471

Under Schedule A, the filer is required to include a description of each type of stock — including the total amount of stock issued by the Corporation at the beginning of the accounting period, and at the end of the accounting period.

  • It is important to note, that it is not asking how many shares the filer has but rather the total types of stock the Corporation issues and the total number of shares issued for the accounting period.

Schedule B Shareholders of Foreign Corporation on Form 5471

Schedule B can be broken down into two parts: Part 1 and Part 2. Part I Category three and four filers are required to complete part one for US persons who either directly or indirectly own 10% or more in value or voting power of any class of stock. Part I refers to information about the specific shareholders of the foreign Corporation who are considered US shareholders. for each US shareholder, the form requires the filer to provide:

      • Name

      • Address

      • Identifying Number of Shareholder

      • Description of Stock

      • Number of shares at Beginning of Account Period

      • Number of shares at End of Account Period

Part II Part 2 is required by filers who qualify as categories:

  • 1a & 1c
  • 3
  • 4
  • 5a & 5c

Part 2 generally asks for the same information required in part one.

Schedule C Income Statement for Form 5471

Schedule C is the part a form 5471 that begins to get more difficult. It requires the filer to complete an income statement, where the filer must identify the income, deductions, net income and other comprehensive Income — in both functional and US currency. As provided by the form:

      • Report all information in functional currency in accordance with U.S. GAAP. Also, report each amount in U.S. dollars translated from functional currency (using GAAP translation rules).

      • However, if the functional currency is the U.S. dollar, complete only the U.S. Dollars column. See instructions for special rules for DASTM corporations.

Income

      • 1a. Gross receipts or sales

      • 1a. b Returns and allowances

      • 1c. Subtract line 1b from line 1a

      • 2. Cost of goods sold

      • 3. Gross profit (subtract line 2 from line 1c)

      • 4. Dividends

      • 5. Interest

      • 6a. Gross rents

      • 6b. Gross royalties and license fees  

      • 7 .Net gain or (loss) on sale of capital assets

      • 8a. Foreign currency transaction gain or loss—unrealized

      • 8b. Foreign currency transaction gain or loss—realized

      • 9. Other income (attach statement)

      • 10. Total income (add lines 3 through 9)

Deductions

      • 11. Compensation not deducted elsewhere

      • 12a. Rents

      • 12b. Royalties and license fees

      • 13. Interest

      • 14. Depreciation not deducted elsewhere

      • 15. Depletion

      • 16. Taxes (exclude income tax expense (benefit))

      • 17. Other deductions (attach statement—exclude income tax expense (benefit))

Net Income

      • 18. Total deductions (add lines 11 through 17)

      • 19. Net income or (loss) before unusual or infrequently occurring items, and income tax expense (benefit) (subtract line 18 from line 10)

      • 20. Unusual or infrequently occurring items

      • 21a. Income tax expense (benefit)—current

      • 21b. Income tax expense (benefit)—deferred

      • 22. Current year net income or (loss) per books (combine lines 19 through 21b)

Other Comprehensive Income

      • 23a. Foreign currency translation adjustments

      • 23b. Other

      • 23c. Income tax expense (benefit) related to other comprehensive income

      • 24. Other comprehensive income (loss), net of tax (line 23a plus line 23b less line 23c)

Schedule F Balance Sheet for Form 5471

When Taxpayers come to us with their hands up letting us know they have all but given up on the process and please help, is when they get to the balance sheet. The idea of the balance sheet is that your balancing the assets against liability and equity. In other words, the value of the assets should balance with the value of the liabilities and equity. If it doesn’t balance then the balance sheet is off and it’s just a very easy way for the IRS to audit you on it. Assets

      • 1. Cash

      • 2a. Trade notes and accounts receivable

      • 2b. Less allowance for bad debts

      • 3. Derivatives

      • 4. Inventories

      • 5. Other current assets (attach statement)

      • 6. Loans to shareholders and other related persons

      • 7. Investment in subsidiaries (attach statement)

      • 8. Other investments (attach statement)

      • 9a. Buildings and other depreciable assets

      • 9b. Less accumulated depreciation

      • 10a. Depletable assets

      • 10b. Less accumulated depletion

      • 11. Land (net of any amortization)

      • 12. Intangible assets:

      • 12a. Goodwill

      • 12b. Organization costs

      • 12c. Patents, trademarks, and other intangible assets 

      • 12d. Less accumulated amortization for lines 12a, 12b, and 12c

      • 13. Other assets (attach statement)

      • 14. Total assets

Liabilities and Shareholders’ Equity

      • 15. Accounts payable

      • 16. Other current liabilities (attach statement)

      • 17. Derivatives

      • 18. Loans from shareholders and other related persons

      • 19. Other liabilities (attach statement)

      • 20. Capital stock:

        • a Preferred stock

        • b Common stock

      • 21. Paid-in or capital surplus (attach reconciliation)

      • 22. Retained earnings

      • 23. Less cost of treasury stock

      • 24. Total liabilities and shareholders’ equity

Schedule G Other Information Form 5471

There is another section for schedule G which asked the taxpayer lots of different questions about their ownership in the foreign Corporation , whether they were disregarded, base erosion and other more complex matters.it is important that the taxpayer go through the information in detail to make sure none of it applies to them — and if it does, then to make sure it is marked accordingly

Schedule I Summary of Shareholder’s Income From Foreign Corporation

Section I us used in order to tally up all of the income associated from the foreign Corporation. it asks about very specific types of income , with the focus on subpart F and other extraordinary income.

      • 1 a. Section 964(e)(4) subpart F dividend income from the sale of stock of a lower-tier foreign corporation (see instructions)

      • Section 245A(e)(2) subpart F income from hybrid dividends of tiered corporations (see instructions) .

      • Subpart F income from tiered extraordinary disposition amounts not eligible for subpart F exception under section 954(c)(6)

      • Subpart F income from tiered extraordinary reduction amounts not eligible for subpart F exception under section 954(c)(6)

      • Section 954(c) Subpart F Foreign Personal Holding Company Income (enter result from Worksheet A)

      • Section 954(d) Subpart F Foreign Base Company Sales Income (enter result from Worksheet A)

      • Section 954(e) Subpart F Foreign Base Company Services Income (enter result from Worksheet A) .

      • Other subpart F income (enter result from Worksheet A)

      • 2. Earnings invested in U.S. property (enter the result from Worksheet B)

      • 3. Reserved for future use

      • 4. Factoring income

        • See instructions for reporting amounts on lines 1, 2, and 4 on your income tax return.
      • 5a. Section 245A eligible dividends (see instructions)

      • b. Extraordinary disposition amounts (see instructions)

      • c. Extraordinary reduction amounts (see instructions)

      • d. Section 245A(e) dividends (see instructions)

      • e. Dividends not reported on line 5a, 5b, 5c, or 5d

      • 6. Exchange gain or (loss) on a distribution of previously taxed earnings and profits

      • 7a. Was any income of the foreign corporation blocked?

      • b. Did any such income become unblocked during the tax year (see section 964(b))? If the answer to either question is “Yes,” attach an explanation.

      • 8a. Did this U.S. shareholder have an extraordinary disposition (ED) account with respect to the foreign corporation at any time during the tax year (see instructions?

      • b. If the answer to question 8a is “Yes,” enter the U.S. shareholder’s ED account balance at the beginning of the CFC year $ and at the end of the tax year $. Provide an attachment detailing any changes from the beginning to the ending balances.

      • c. Enter the CFC’s aggregate ED account balance with respect to all U.S. shareholders at the beginning of the CFC year $ and at the end of the tax year $ . Provide an attachment detailing any changes from the beginning to the ending balances.

      • 9. Enter the sum of the hybrid deduction accounts with respect to stock of the foreign corporation (see instructions) $ Form 5471 (Rev. 12-2020)

Separate Schedules (There’s More)

As if the comprehensive form 5471 is not in and of itself complicated enough, there are several potential separate schedules that you may also have to complete in addition to the schedule is included as part of the actual form.

      • Separate Schedule I-1

      • Separate Schedule J

      • Separate Schedule M

      • Separate Schedule O, Part I

      • Separate Schedule O, Part II

      • Separate Schedule P

      • Separate Schedule

      • Separate Schedule R

This is probably enough information for one article, and if you’re still awake will be posting additional articles identifying the separate schedules and instructions for each one of those as well.

Form 5471 Penalties

There are various penalties the IRS can issue if the 5471 is not filed timely:

          • Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.

          • Criminal penalties. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.

Form 5471 is a Tax Adventure

In conclusion, when it comes to international information reporting, the Form 5471 is one of the more complicated international reporting forms. it is important to properly assess and evaluate the business information before attacking the form and then carefully and methodically moving through each section. If it gets too overwhelming, you may want to consider retaining a specialist to assist you.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm today for assistance.