IRS Revenue Procedure 92-70 – 5471 Dormant CFC Rules

IRS Revenue Procedure 92-70 & 5471 Dormant CFC Rules

IRS Revenue Procedure 92-70 (5471 Dormant CFC Rules)

IRS Revenue Procedure 92-70: The IRS form 5471 is a very complicated international tax form. It requires U.S. persons with an interest in or ownership over a foreign corporation to report the information annually to the IRS. Unlike other international information reporting forms, the form 5471 can be quite complicated. The form serves as a tax return for the foreign corporation. The filer must include the income generated and expenses deducted — along with a “balanced” financial sheet. But, if the foreign corporation qualifies as dormant under Rev. Proc. 92-70, the IRS cuts the filer a break, and limits the Taxpayer’s reporting requirements.

IRS Revenue Procedure 92-70

The filing requirements for IRS reporting of Foreign Corporations on the 5471 form can be very difficult to digest.

Many investors in foreign corporations do not have a tax background, and the thought of spending the estimated 30+ hours on preparing the form outweighs any benefit the taxpayer receives.

If the business qualifies as a “dormant” corporation, the filer may be able to sidestep some of the more complicated aspects of the reporting (although the form 5471 still must be reported).

5471 Dormant Foreign Corporation

As provided by the IRS (relevant parts):

Background

• • • 6038(a)(l) imposes information reporting requirements on any United States person who controls a foreign corporation.

    • Pursuant to section 6038(a)(4), the information reporting requirements prescribed in section 6038 (a)(1) also are imposed on any United States person who is treated as a United States shareholder of any foreign corporation that is treated as a controlled foreign corporation for any purpose under subpart F.

    • Section 6046(a)(3) imposes reporting requirements on each person who is treated as a United States shareholder of a controlled foreign corporation under section 953(c).

    • Section 1.6038-2 of the Income Tax Regulations requires a United States person controlling a foreign corporation to file an annual information return on Form 5471 specifying certain identifying information, stock, shareholder, earnings and profits, and financial information about the foreign corporation, as well as transactions between the foreign corporation, the filer, certain other shareholders, and entities related to the filer or the foreign corporation.

    • Section 6679 imposes monetary penalties for a failure to timely file a return or to provide information specified in any return required by section 6046 absent a showing of reasonable cause for the failure.

    • Criminal penalties (fines and imprisonment) are imposed by section 7203 for a willful failure to file a return, including an information return required by section 6038 or 6046.

Scope for Dormant Corporations

• • • “This revenue procedure applies to persons required under section 6038(a)(1), 6038(a)(4) or 6046(a)(3) to file a Form 5471 with respect to a foreign corporation that is a dormant foreign corporation. For purposes of this revenue procedure, a foreign corporation is a dormant foreign corporation if, at all times during the foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)):

    • (1) the foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;

    • (2) no shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;

    • (3) no assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;

    • (4) the foreign corporation received or accrued no more than $5,000 of gross income or gross receipts;

    • (5) the foreign corporation paid or accrued no more than $5,000 of expenses;

    • (6) the value of the foreign corporation’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;

    • (7) no distributions were made by the foreign corporation; and

    • (8) the foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.”

Recap of Dormant Corporation Requirements (92-70)

• • • No business was conducted

    • No shares were sold

    • No assets were sold

    • No more than $5,000 of GROSS income

    • No more than $5,000 of GROSS expenses

    • Value of corporation assets did not exceed $100,000

    • No distributions; and

    • No current Accumulated Earnings (de minimis rules)

General Procedure

• • • “.01 In lieu of filing a complete Form 5471 for each dormant foreign corporation, the filer may use the summary filing procedure described in this section.

    • A filer may not use this summary filing procedure to report an interest in a foreign corporation that was a dormant foreign corporation in a prior year but that does not meet the requirements of section 3 above in the current filing year.

    • To elect the summary filing procedure, the filer must attach and file Page One of the Form 5471 (the summary return) for each dormant foreign corporation with its regularly filed income tax return. The filer also must file a copy of each summary return with the Internal Revenue Service Center, Philadelphia, PA, along with the filer’s other Forms 5471 (if any). The top margin of each summary return must be labeled “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”

Relief

• • • “Persons complying with the summary filing procedure described in section 4 satisfy their Form 5471 filing obligations arising under sections 6038(a)(1), 6038(a)(4), and 6046(a)(3) as to the specified dormant foreign corporations.

    • Accordingly, sections 6038(b)(1), 6038(c), 6679, and 7203 will not apply to a filer properly employing the procedure. However, penalties and foreign tax credit reductions under sections 6038(b)(2) and 6038(c)(1) can be imposed (pursuant to sections 1.6038-2(k)(l)(ii) and l.6038-2(k)(2)(iv) of the regulations) for a failure to timely furnish information under section 4.05 of this revenue procedure.”

Non-Compliance with U.S. Tax Law

Whether it is because you did not you had to report foreign corporations, were below the threshold for filing in a foreign country, and/or have other unreported income, accounts, investments or assets – we can help.

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