IRS Form 5471 (2019) – When to File a 5471 & Avoid Fines & Penalties
IRS Form 5471 (2019) – When to File a 5471 & Avoid Fines & Penalties: U.S Person who are an officer, director, owner, and/or shareholder in a foreign corporations, may have to file form 5471 in order to comply with IRS reporting under sections 6038 and 6046.
Common Questions on 5471 reporting:
- What is a Form 5471?
- Who has to file it?
- When is it due?
- What are the categories of filers?
- What is a controlled foreign corporation?
- Why does that matter?
- What if I did not receive income?
- What is a Per Se corporation?
- What if I already filed an 8621 or 8938
Don’t worry, we can help.
IRS International informational returns can be very complicated. That is because oftentimes, when a U.S. Person owns or has an interest in a foreign corporation, they do not consider it an active investment.
Form 5471 may have to be filed, even if:
- U.S. Owners are not actively involved in the business
- Are not receiving any income
- The Foreign Corporation is not a CFC
- It is a “losing investment”
The reason why Form 5471 so complicated, is because it involves issues such as Assets, Liabilities, and Equity — which many people are not familiar with.
It may be required by U.S. Persons — even if they are not U.S. Citizens and live abroad. It depends on which “Category of Filer(s)” you are considered.
Do you Meet the Threshold Requirements for Filing?
IRS Form 5471 have 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.
Common Reporting Foreign Corporation Issues include:
- Who has to file?
- When is it due?
- What if I filed Form 8938?
- What if I missed the filing deadline?
- Does the IRS issue penalties?
- How can I avoid penalties?
*The form should be distinguished (since it is often confused) with Form 5472, which is an information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
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)
Why Do I Not File 8938?
The form 8938 is used to report specified foreign assets. Typically, the scenario will include a foreign bank account or foreign stock ownership. When a person owns a percentage of a foreign corporation, they would typically report their interest on a form 8938… unless they meet the threshold requirement of having to file form 8865. In that case, individual will file a form 5471 instead of a form 8938 as to that particular interest in the foreign corporation.
Similar to Form 8865, but…
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.
What are the Five (5) Different Categories of Filers
Category 1: (previously reserved) is now used by U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965
Category 2: A person who owns at least 10% or more of the foreign corporation
Category 3: A person acquires stock in total of stock ownership exceeds 10%
Category 4: A U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period
Category 5: A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.
Did You Own More Than 10% of the Foreign Corporation?
Many individuals with mere ownership/investment interest in a foreign corporation do not consider themselves the owner of a corporation simply because they own more than 10%. In other words, if you were to purchase 15% of a foreign corporation but did not have any input or other management of the Corporation, you probably would not consider yourself to be an “owner” as much as an “investor.” With that said, if you own more than 10% of a foreign corporation then your required to file a form 5471 annual return each year (certain exceptions/exclusions apply)
Did You Control the Corporation for More than 30 Days?
Even if you only control the corporation for a small period of time, usually exceeding 30 days, you are still required to file form 5471. In fact, if you had control over the foreign corporation for at least 30 days, than you also need to file various different schedules regarding specifics of the Corporation. Depending on whether you are a category 2,3,4, or 5 Filer will help determine which schedules you have to file.
It Does Not Need to be a Controlled Foreign Corporation
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 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.
It Does Not Matter Where You Live
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.
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.
IRS 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.
How to Get Into IRS Compliance for Form 5471?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists
The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.
In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.
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4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)