Form 5471 Instructions – Tips for Understanding Category of Filers
Form 5471 Instructions – Categories of Filers
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.
While we always recommend speaking with an experienced International Tax Attorney before tackling this form, we are providing a brief summary of the different types of categories of filers to help bring some clarity as to who is supposed to file and what schedules.
*There are many exceptions and exclusions to filing.
Category 1: Repealed
Hooray! The Internal Revenue Service Repealed this particular category, so there’s nothing to concern yourself with regarding a Category 1 filer (Read: the other categories are still hard).
Category 2: 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: 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%.
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 example, a US person Scott, received a significant acquisition of stock in the current year so that he owned 51% of the corporation (even if temporarily to hold it for a 30, 60, or 90 day period). As a result, Scott would file a form 5471 as a category 4 Filer.
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.
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 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.
Never Filed a Form 5471 Before But Should’ve – Penalties
Failure to file information required by section 6038(a) (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 information required by section 6046 and the related regulations (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. Section 6662(j). 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.
If you never filed the form 5471 in prior years, there are many steps you will have to take before filing this form. You cannot or should not just file late form 5471’s due to the extremely high penalties that can be issued.