Which IRS Form Do I Use to Report My Foreign Corporation?
We receive this question often, and the confusion is often due to the similarity between Form 8938 and Form 5471. For some reason, the IRS will not issue clear instructions about filing. Moreover, due to the overlap between the two forms, it can get very confusing, very quickly.
Both Forms 8938 and 5471 involve the reporting of foreign assets, but while form 8938 involves specified foreign assets (more broad) form 5471 is limited to foreign corporations (more limited).
Due to the fact the IRS penalties are extraordinarily high for the failure to file either form, it is important to at least have a basic understanding of the two different forms, and why certain circumstances you may have to file one form, but not the other.
Due to the fact that the IRS Penalties can be extraordinarily high, we do recommend speaking with an experience international tax attorney before making any proactive representation or filing any documents with the IRS regarding these matters. This article is merely a summary to a provide a starting point on analyzing which form to file, and should not be relied upon to prepare the form yourself.
Read: Please do not contact us to tell us you are preparing the Form 8938 or 5471 on your own (or with your CPA) with this article, but just have a few questions — we are flattered, but you will not receive a response.
Value vs. Ownership Percentage
Form 8938 was introduced with respect to FATCA. FATCA is the Foreign Account Tax Compliance Act and is an act developed to reduce or cutdown on offshore tax fraud and evasion.
To determine whether a person must file form 8938, there are two main issues:
- Does a person have an interest in the asset?
- Does the person meet the threshold requirement?
Interest Ownership of the Asset
In order for a person to have an interest in the assets, they usually must own the asset, but that is not a hard and fast rule. Here is a typical example: David owns 100 shares of a foreign corporation that is worth $400 million. The shares are worth around $400,000 — they belong to David, and are owned exclusively by David. Thus, David would have an interest in the asset.
Conversely, Michelle’s name is on a trading account with her brother as a signature authority person only. She has no investment in the account and none of the money belongs to her. While she would have to file an FBAR (the account is worth $800,000), she does not have any interest in the account, and therefore may not need to file the Form 8938 (if she is also listed as a beneficiary, she may have an interest to report).
Let’s say the value of David’s 1% ownership was $700,000, but David only owns less than 1% of the foreign corporation. As a result, David would meet the threshold requirement having to file a FATCA Form 8938. But, because David only owns less than 1% of the foreign corporation, and was never in control of the corporation at any time, David would most likely not have to file a form 8938.
In other words, when determining whether a person meets the threshold requirements for filing form 8938, the key factor will be the value ownership. But, when a person is trying to determine whether they meet any of the categories of filers for a form 5471, they will look into whether they meet the ownership percentage for control requirement instead of merely the value.
Year of Acquisition (5471) vs. Ongoing Reporting (8938)
Oftentimes, the determination of when a person is supposed to file one form instead of the other is dependent on whether the person is filing the current year of acquisition or a continuing reporting requirement.
For example, in a year in which a person receives or acquires 10% or more ownership in a foreign corporation, they are going to be required to file a form 5471 to report the acquisition. Usually, this will include a person who purchased or inherited 10% or more ownership as a category 3 Filer.
In the following year, unless the Corporation is a Controlled Foreign Corporation and the person held 10% ownership for at least 30 days, the person will not need to file (other facts permitting) a form 5471 in this ors subsequent years. Rather, if the person meets the threshold requirement for having to file a form 8938 then they will report that ownership as a specified foreign asset on form 8938.
If the value of the stock or other security/assets does not meet the threshold requirement to file form 8938, then neither form may have to be filed.
What Information Must Be Reported on Each Form
There is a monster difference between the reporting requirements for a form 5471 versus a form 8938. Form 8938 is merely to show ownership of the asset. The form requests basic information similar to the FBAR. For example, it may require the name of the asset, the address and estimated value (which does not need to be exact unless it exceeds certain threshold requirements) and a little information about any income it may have generated.
Alternatively, Form 5471 is a complex form that requires some understanding of accounting principles. Depending on what level of ownership a person has, they may have to report many pages of information detailing the assets, equities, liabilities, deductions etc.
The Schedules an individual may have to file with respective form 5471 will vary depending on which category of filer the individual is.
An Asset Owned by Multiple People
It seems that even the IRS does not want to be inundated with unnecessary people (to some degree). Therefore, when it comes to Form 5471, if there are multiple people who are required to file US tax return with respect to a specific before 5471 asset, oftentimes only one person has to file the form – detailing information for each US person.
For example, Corporation X has three individuals within the United States who are required to file form 5471 – ordinarily, only one person would have to file a Form 5471 on behalf of all three individuals.
As to the 8938, each individual owner of the asset should file the form. For example, if two non-related individuals each own a half $1 million stock in a foreign corporation, even if the ownership is identical, they should each file their own individual 8938 Form.
There is no need to try to scare you about the penalties. The reality is, the IRS has made IRS offshore tax and reporting a key enforcement priority. This is in part due to the billions of dollars of collected money under offshore disclosure programs – as well as the billions of dollars tax originating foreign assets, which goes uncollected by the IRS.
For individuals who had several years of unreported assets, the penalties can easily reach six figures. Therefore, if you have not yet brought yourself into compliance regarding form 5471 or form 8938 you are advised to do so.
Depending on the facts and circumstances of your case, you may qualify for certain reduced penalties and/or penalty waiver programs. In determining which program you may qualify for, you should consider using a totality of the circumstances analysis with an experienced international tax attorney before making any proactive representation to the IRS.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)