IRS Form 5471 Instructions
In recent years, the IRS has aggressively increased enforcement of offshore reporting and compliance, In addition, if a shareholder has offshore assets, accounts, investments or income, such as Subpart F income, CFC, or GILTI — then 5471 reporting becomes more complicated.
The Golding & Golding form 5471 instructions are designed to simplify your understanding of the reporting requirements.
There have been revisions to the form in both 2017 and 2018, with a major revision in 2019.
There are five (5) different categories of filers, various schedules to be filed, and balance sheets to prepare.
And, with the introduction of the Tax Cuts and Jobs Act (TCJA), GILTI (Global Intangible Low-Taxed Income) and general Subpart F and CFC rules — reporting is even harder than before.
Let’s review the basics:
Who Must File form 5471?
U.S. shareholders, directors, and officers of a foreign corporation may have to file IRS form 5471.
Generally, all U.S. persons described in Categories of Filers below must complete the schedules, statements, and/or other information requested in the chart, Filing Requirements for Categories of Filers, later.
Read the information for each category carefully to determine which schedules, statements, and/or information apply.
When and Where To File?
IRS form 5471 is filed alongside your tax return. If you apply for an extension for your tax return, your form 5471 goes on extension as well.
Attach Form 5471 to your income tax return (or, if applicable, partnership or exempt organization return) and file both by the due date (including extensions) for that return.
Categories of Filer (and Examples)
*There are many exceptions and exclusions to filing.
Category 1: IRC Section 965
This category was recently updated 12/2018, and we will provide further updates. 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: 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 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.
There are various scheduled you may need to include with the submission. Picture yourself at the car dealership. Sure, that car looks nice, but later you realize it’s fully equipped, and the price is more than the sticker-price would reflect.
Same principle applies here: Form 5471 gets you 75% of the way home — then you have the add-ons, in the form of different schedules.
The Schedule O is the: Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock
The Schedule J is the: Accumulated Earnings & Profits (E&P) of Controlled Foreign Corporation
The Schedule P is the: Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations
The Schedule M is the: Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons
The Schedule E is the: Income, War Profits, and Excess Profits Taxes Paid or Accrued
The Schedule H is the: Current Earnings and Profits
5471 vs. 5472
Form 5471 is used by U.S. Persons to report Foreign Corporations. A Form 5472 is used by Foreign Persons who have certain ownership or interest in U.S. Corporations (aka Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).
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.
IRS 5471 Form & TurboTax
Unfortunately, most tax programs do not include Form 5471 and many CPAs and Accountants do not have experience preparing this type of form — so if you found who does, give them an extra thanks.
Form 5471 is used by U.S. persons to report ownership or interest in Foreign Corporation(s). You have to file the form, even if you do not have to file a Form 1040 in the current year, and/or no income was received.
Form 5471 Instructions 2018
There were some changes to the form 5471, due to the implementation of new tax laws, which impact international tax reporting. Therefore, be sure you are referring to the correct years when completing the form.
Form 5471 Penalties for Late or Non-Filed Forms
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.
Get Into IRS Compliance
If you are seeking to get into compliance for a late filed 5471 there are few different alternatives.
The alternatives will depend on whether the form 5471 is a stand-alone issue, whether there are also other unreported foreign accounts, income, etc. in which the person may consider a streamlined application instead of a reasonable cause submission (presuming of course, that the individual was non-willful and/or had reasonable cause), the amount of unreported gift, inheritance or trust distribution, etc.
Typically, the best option may be for you to enter of the approved IRS Offshore Voluntary Disclosure Programs.
What Can You Do?
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.
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.