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Form 5471 Instructions – IRS Form 5471 Example Analysis (2018)

Form 5471 Instructions - IRS Form 5471 Example Analysis (2018) - Golding & Golding

Form 5471 Instructions – IRS Form 5471 Example Analysis (2018) – Golding & Golding

Form 5471 Instructions – IRS Form 5471 Example Analysis (2018)

Reporting Foreign Corporations to the IRS is a difficult  form, and may be required by some by U.S. Taxpayers with an interest in, or ownership of a Foreign Corporation.

Form 5471 Instructions can be difficult to understand, so we are providing examples of how the IRS determines if you have to file, and what category of filer you are.

Common Questions we receive, include:

  • What is a IRS Form 5471?
  • Who has to file IRS Form 5471?
  • When do I file IRS Form 5471?
  • What are “Categories of Filers”?
  • What if I do not file a IRS Form 5471
  • Can I go to jail?

Form 5471 Instructions

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Category 1: Repealed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 The Internal Revenue Service Repealed this particular category, so there’s nothing to concern yourself with regarding a Category 1 filer (Read: the other categories are still hard).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 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:

  1. 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.
  2. David, a US person owns 100% share of the foreign corporation. David is a Category 5 Filer
  3. 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

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.

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.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds 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.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Recent cases we had to fix after taking over from less experienced counsel that flubbed the case can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.