Form 5471: When a U.S. Person Taxpayer has a foreign corporation, they may have an IRS reporting requirement. The reporting is not determined by whether any income was generated, or if the business turned a profit. There are five (5) categories of filers who may be required to file a Form 5471. The technical name for the form is the Information Return of U.S. Persons With Respect To Certain Foreign Corporations. Unlike other reporting forms such as the FBAR and the Form 8938, the Form 5471 is very comprehensive. 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. The IRS strictly enforces reporting compliance and routinely issues penalties for non-compliance.
We summarize the basics of Form 5471 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 refers to: “Information reporting with respect to certain foreign corporations and partnerships”
IRC 6046 refers to: “Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock.”
Who Has To File Form 5471?
There are 5 Different categories of filers who may have to file Form 5471.
5471 Categories of Filers
Here are 5471 examples of who may have to file the form:
Category 1 Filer: IRC Section 965
This category was recently updated.
As provided by the IRS:
“This category includes a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (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.”
Category 2 Filer: Officer or Director of a Foreign Corporation
A Category 2 filer includes when a U.S. Citizen or Resident was an Officer or Director of a Foreign Corporation in which a US person has acquired at least 10% stock ownership or an additional 10% or more of the outstanding stock of the foreign corporation.
Typically, this will involve a situation in which a US Citizen or Resident was made an officer such as CFO, CEO, COO or other officer of a foreign corporation. What is important to note about this category of filing is that a Corporation does not need to be a Controlled Foreign Corporation (aka CFC).
In other words, the IRS does not require that at least More Than 50% of the business is being owned by U.S. Persons who each have at least 10% share in the Corporation either directly or indirectly through attribution.
Example of Category 2 Filer
David is a US citizen and he was named CEO of a company that is a foreign corporation and operates solely in Hong Kong. Michelle is a US person who owns 15% in the Corporation. As a result, David would file a form 5471 as at least a category 2 Filer, even if corporation does not meet the threshold of being a CFC.
Category 3 Filer: Stock Acquisition
When a person acquires stock in a foreign corporation, the IRS wants to know about it. Not necessarily in all scenarios, but especially when certain threshold requirements are met.
One of the most common scenarios is when a US person obtains stock in a foreign corporation (again, like in category two, there is no requirement that the corporation be a Controlled Foreign Corporation) and that person now has at least 10% ownership of the stock (ownership can be a bit of a nebulous concept).
But if a person acquired 10%, then they have to report it on Form 5471. It does not mean that the person had to acquire 10% of stock on that particular day, but it just means that in total as a result of the acquisition, the individual now owns at least 10%.
Example of Category 3 Filer
Fred is a U.S. Person. His sweet Grandma passed away, and left him 12% interest in a foreign corporation (out of all of her grandkids, she liked Fred the best). Now Fred would be considered a Category 3 filer in the current year.
Category 4 Filer: Control
A category 4 Filer is a pretty easy threshold to meet. It just means, that an individual had control of a foreign corporation for at least 30 days (uninterrupted) during the annual accounting period of the foreign corporation.
For this particular category of filer, the IRS provides a specific set of guidelines determine if the person is a US person. It should be noted, that it includes a Citizen or Resident of the United States, certain nonresident aliens who make elections, a domestic partnership, a domestic corporation, and certain estates.
Is important to understand briefly why the IRS expands the definition under this particular category. It is so if ownership is transferred from one domestic Corporation, Partnership or Person to another (which can be for any number of tax purposes), the IRS will want to know about this. So even though a U.S. corporation may own 50 other subsidiaries, and only controlled this particular foreign corporation for 35 days during a transition in ownership, if the control was for at least 30 days uninterrupted — it will have to file this as a category 4 Filer.
Note: a category 4 filer has to file the most number of 5471 schedules of any category of filer.
Example of Category 4 Filer
Scott (a U.S. Person), is destined (whether he knows it or not) to take over his father’s business in Taiwan. To test the waters (Scott has a shiny new MBA), his father put him in control of the company for 6 months. Scott would be a Category 4 filer.
Category 5: Controlled Foreign Corporation
It is important to note that the Internal Revenue Service has included an extra threshold requirement for a category 5 Filer, which reduces the number of people who will have to file.
Under Category 5, a person has to file form 5471 when they have at least 10% ownership of the Corporation (directly, indirectly, or constructively). While this will include many people, it is limited to corporations, which are considered Controlled Foreign Corporations.
A CFC is a Foreign Corporation that is controlled by U.S. Person — meaning it is owned by more than 50% by US persons, who each own at least 10%. Therefore, it is important to ensure that the CFC is in fact a CFC before determining whether a US person has to file as a category 5 Filer.
Three Common Category 5 Examples:
- Peter owns 12% of a foreign corporation that is owned 60% by US persons who each own at least 10%. Peter is a Category 5 Filer.
- David, a US person owns 100% share of the foreign corporation. David is a Category 5 Filer
- Heather owns a foreign corporation 50% with a foreign person. Heather does not need to file as a category 5 Filer.
Exceptions, Exclusions, Etc.
This is just a brief summary of who may have to file under 5471 rules. There are exceptions and exclusions to filing which may apply. The laws and rules change, and it is important to speak with an experienced international tax lawyer before completing these forms.
Form 5471 Threshold Filing Requirements
IRS Form 5471 has very specific filing requirements, depending on which category of filer you qualify as.
The rules for income tax and reporting are not the same. In other words, you may have to file, even if no income was earned. And, even if you never received income, if the foreign corporation is a CFC, and there was Subpart F income — you may have to pay tax on the income attributed to you, even though you never received it.
Generally, filing is required for foreign corporations, and foreign companies which may deemed a foreign corporation. If the 5471 is not filed timely (or at all), the IRS has the right to issue pretty severe penalties — although you may use amnesty or penalty abatement procedures to reduce or eliminate the penalties.
Form 5471 Penalties
When it comes to IRS penalties and foreign corporations, the penalty for failing to file form 5471 can be severe. In fact, Form 5471 Penalties can reach as high as $50,000 per penalty. If you have been issued a penalty for an un-filed form 5471, you may consider retaining experienced counsel to try to fight or reduce the penalty aka obtain an IRS Penalty Abatement.
Alternatively, if you have not yet been issued a penalty for failing to file form 5471, you should consider getting into compliance proactively by submitting to IRS Offshore Voluntary Disclosure.
Failure to file Form 5471 and Schedule M
A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged 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 for each 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 under sections 901, 902, and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c) (2) for limits on the amount of this penalty.
Failure to file Form 5471 and Schedule O
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 under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.
Note. Any person required to file Form 5471 and Schedule J, M, or O who agrees to have another person file the form and schedules for him or her may be subject to the above penalties if the other person does not file a correct and proper form and schedule.
Penalties may be imposed for undisclosed foreign financial asset understatements. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See sections 6662(j) and 6664(c) for additional information.
Form 5471 (FAQ) Questions & Answers
Reporting a foreign corporation on a 5471 form is hard. These are just some of the more common questions we receive:
It is not limited to Controlled Foreign Corporations
This is where many individuals begin to get confused – and understandably so because the information available online is often incorrect. From a general standpoint, the IRS has very strict rules regarding certain types of income when the corporation is a foreign corporation and a controlled foreign corporation. A controlled foreign corporation (CFC) is when U.S. persons own more than 50% of the corporation and each shareholder owns at least 10% (attribution rules apply). Therefore, simply because you do not own a foreign corporation that is considered a CFC, does not mean you are exempt from filing Form 5471.
You do not need to have received Subpart F Income
This is another complicated topic that seems to throw off many individuals and inexperience CPAs or tax attorneys who hold themselves out as “experts.” Support F income is a specific type of income which is usually passive income in which a person has to pay tax on even if that money was not distributed. Without getting too technical, the purpose of Subpart F income is to avoid companies hoarding money offshore through passive means and not paying any tax on the earnings. It is not an uncommon concept under U.S. Tax Law, just as corporations may be taxed an additional 20% when the retained earnings are too high.
*Whether or not your controlled foreign corporation has subpart F income is important, but not respect to meeting the threshold performance of having to file a Form 5471.
You Did Not Need to Have Received Any Income
Four 5471 is an informational tax return. This is to report information regarding the foreign corporation. If income was paid to owners or shareholders of the business, it would be reported on the return, but it is not a threshold requirement of having to file the Form 5471. In other words, if you otherwise meet the threshold requirement as a category two, three, four, or five filer — than the mere fact that you did not earn any income from the foreign corporation does not exempt you from filing.
Do I File an 5471 or 8938?
When a person has a qualifying interest in a Foreign Corporation, the information is reported on this form and it is filed along with their tax return (or separately if no tax return is required).
Typically, a person will file a form 8938 (Reporting Specified Foreign Financial Assets) if they have an interest in an offshore investment, which does not meet the threshold requirement of an 8865 or 5471, and/or it is not the year of acquisition. But, if the ownership is in the year of acquisition and/or the the value/percentage of the ownership increases, the person may have to file a form 5471 instead of the 8938 for the particular asset.
This is especially true when it involves a foreign partnership.(a person does not file the same form 8938 and 5471 for the same interest...although if accounts are involved, an FBAR may be required)
Similar to Form 8865, but not the Same
While the form is similar to a form 5471 involving foreign corporations, and the 5471 is more common (for the simple fact that more individuals have interests in foreign corporations than they do in foreign partnerships), there are important distinctions regarding these two forms.
U.S. Resident or Foreign Resident
Whether or not you reside in the United States or not, you are still required to file this form when you otherwise meet the requirement as a category two, three, four, or five filer. There is some bad information online which indicates that if you live abroad, you do not need to file this form. That is incorrect in a while if you qualify to streamline foreign offshore disclosure program you may receive a waiver of penalty on otherwise includable ownership of a 5471 Corporation, you still must file the form.
Some Foreign Corporations are Per Se
A common scenario for individuals who owned LLCs in the United States is to disregard the entity and file the business information directly on a form schedule C which is filed with a US tax return. While a person can feasibly disregard a foreign entity as well, the IRS lists hundreds of per se corporations which are de facto — and which cannot be disregarded. In other words, if you own this particular type of foreign entity, then you must file a form 5471 and cannot otherwise disregard the entity.
Sociedad Anonima Form 5471
We represent numerous individuals worldwide, especially in Latin American countries where this is a very common form of corporate and estate planning structure. For many individuals, they will form a 90/10 S.A. with a local individual in order to operate the foreign property or business. For example, many individuals will have rental properties are small businesses such as resort that they operate in a foreign country, and establish the business as an S.A. Whether the S.A. is being used for estate planning for business purposes, a form 5471 must still be filed.
Foreign Accounts Owned the By The Corporation
If the foreign company has accounts of which you have signature authority or other ownership of, chances are you are going to have to file an FBAR (report of foreign bank and financial account) for each account you have ownership of signature authority of. In addition, you may also need to file a form 8938 regarding the specific accounts.
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.