25 Important Things to Know about IRS Form 5471

Form 5471

Form 5471 

Form 5471: The Form 5471 is becoming an increasingly important form for any US taxpayers in the world with interest in a foreign corporation. The form is more complicated than some of the other IRS international tax reporting forms — not only because the form is longer than its FBAR or Form 8938 counterparts, but because it requires significantly more information from the filer. When coupled with the requirements involving GILTI (Global Intangible Low-Taxed Income) and Subpart F, the form can get very complicated for many taxpayers to complete — presuming they can even obtain the necessary information required to complete the form. 

Let’s review 25 basics of reporting the Form 5471:

Who has to Report Ownership in a Foreign Corporation?

When a US person has an ownership or interest in a foreign corporation, they may be required to file a Form 5471. The Form 5471 is a relatively detailed form. Unlike the FBAR or Form 8938, the Form 5471 requires the taxpayer to provide information involving the corporate income, expenses, and balance sheets for the company. This can be very complicated, especially for taxpayers who do not have any finance background and/or when the foreign “books” are in a different language.

IRC 6038

IRC 6038 is the Internal Revenue Code section that deals with foreign corporation reporting.

Specifically, it is referred to as: 26 U.S. Code § 6038 – Information reporting with respect to certain foreign corporations and partnerships.

As provided by the code section:

• “Every United States person shall furnish, with respect to any foreign business entity which such person controls, such information as the Secretary may prescribe relating to—
• (A) the name, the principal place of business, and the nature of business of such entity, and the country under whose laws such entity is incorporated (or organized in the case of a partnership);
• (B) in the case of a foreign corporation, its post-1986 undistributed earnings (as defined in section 902(c));?[1]
• (C) a balance sheet for such entity listing assets, liabilities, and capital;
• (D) transactions between such entity and—
  • (i) such person,
    • (ii) any corporation or partnership which such person controls, and (iii)any United States person owning, at the time the transaction takes place—
      • (I) in the case of a foreign corporation, 10 percent or more of the value of any class of stock outstanding of such corporation, and
      • (II) in the case of a foreign partnership, at least a 10-percent interest in such partnership….”

Ownership Pre-dated Becoming a US Person

One common situation we come across is when a US person had ownership or interest in a foreign corporation before they became a US person and therefore believe it is not required to be disclosed — but this is inaccurate. Let’s say for example a foreign person owned a 20% ownership in a foreign corporation before becoming a US person.

Then, in 2018, they became a US person  — in 2018 they may have to file a Form 5471, falling under categories 2 or 3 for “acquiring” an interest.

What is a Per Se Corporation?

The IRS has deemed some foreign corporations to be per se corporations. When a corporation is a per se corporation, then the individual cannot disregard the entity. Rather the foreign entity must remain a corporation under US tax law, such as a sociedad anonima.

Form 5471 is Filed when the Tax Return Due

The Form 5471 is due to be filed at the same time the taxpayer files their tax return.

How to File a 5471 Extension

If a taxpayer requires an extension of filing Form 5471, then they would file an extension on Form 4868 for their regular tax return and then the 5471 will go on extension as well.

No 7004 Extension Required

Some forms require the taxpayer to file a Form 7004 in order to request an extension. For example, one common form for international taxpayers that requires the Form 7004 is the 3520- A. The Form 5471 does not require a 7004 to be filed.

Multiple People Reporting the Same Corporation 

Generally, when a person files a Form 5471, the form can be filed as one form per corporation to include all the US shareholders on that form. There are some limitations to using it by multiple people, but for the most part it can be used to reflect all shareholders in the corporation.

*You should speak with your tax professional to determine whether all filers should (or can) submit a copy of it before using this strategy.

Categories of Filers

Not everyone who has ownership or interest in a foreign corporation is required to file Form 5471. Rather, the form is required by individuals who fall into one of the five categories of filers. And, just because a person is a particular category filer in one year does not mean they will meet the requirement to file as that same category in the next year. Oftentimes, after the initial 5471 is filed, the taxpayer may be able to file the simpler Form 8938 going forward.

Category 1

The Category 1 filer refers to US shareholders of a foreign corporation that fall under Internal Revenue Code Section 965 as Specified Foreign Corporation. Generally, a Specified Foreign Corporation is either a Controlled Foreign Corporation or a corporation in which one or more domestic corporations is a US shareholder — Category 1 may conflict or overlap with Category 5.

Category 2

In a Category 2 filer scenario, there is a US person who is an officer or director of the foreign corporation. In addition, a US person acquires stock which meets the 10% stock ownership requirement or an additional percentage of stock.  This is common in a situation in which there is a foreign company operated primarily by US persons and a new person is introduced into the company — 

Category 3

Category 3 filer is a very common situation. In a Category 3 filing scenario, a US person simply acquires stock in a foreign corporation which (in total) puts them at the 10% stock ownership requirement. It can be newly acquired stock that is added to old stock that puts him above 10% or new acquisition of 10% of stock — without regard for the old stock.

In a common scenario, a foreign person becomes a US person but already owned more than 10% of stock in the foreign company. This would typically require a Form 5471 as a category 3 filer.

Category 4

The Category 4 filer is for US persons who had control of a foreign corporation during the accounting period of the foreign corporation. Control typically means more than 50% of total voting power or more than 50% of total classes of shares of stock.

Category 5

The Category 5 filer is for filers who owns stock in a foreign corporation that is a Controlled Foreign Corporation (CFC) at any time during the year.

Constructive Ownership

When the US person does not own the shares directly, they may still be considered an owner of an asset or company through “constructive ownership”. Generally, constructive ownership may still require the filing of a Form 5471 unless the filer can meet all the conditions that allow for an exception. The main requirement is that the shareholder does not own any direct interest in the foreign corporation.

Form 8938 Instead in Subsequent Year Filings

Oftentimes, a shareholder may have to file a Form 5471 in a particular tax year, but they will not meet the requirement to file a Form 5471 in a subsequent tax year because they do not meet any of the five categories of filers. In this case, the shareholder will usually file a Form 8938 instead — which is a much less complicated form.

Dormant Corporation

The Internal Revenue Service developed Revenue Procedure 92-70 to assist shareholders of dormant foreign corporations. If the foreign corporation is dormant, the taxpayer may still have to file the Form 5471 — but only very limited information is required for reporting.

CFC vs PFIC

Oftentimes, the Controlled Foreign Corporation rules (CFC) and the Passive Foreign Investment Company rules (PFIC) overlap, so that a corporation will qualify as both a CFC and a PFIC. If a shareholder owns at least 10% of a CFC and is being attributed part of the income, then they generally are not subject to the PFIC provisions for the same stock.

*This can get very complicated and if you are in this situation, you should speak with a tax advisor.

Treaty Based Positions

If a person does not want to file a Form 5471 but is unable to disregard the entity, one strategy they may take is to be treated as a foreign person for the tax year under the Form 8833 treaty rules.

If the person is treated as a foreign person for the tax year, they may be able to avoid filing a Form 5471.

Schedules

As international tax becomes more and more complicated, so does the Form 5471. There are many different schedules that a 5471 filer may have to complete in addition to completing the main Form 5471.

GILTI

GILTI Is Global Intangible Low-Taxed Income. The GILTI rules require certain US persons with foreign corporations to pay tax on certain money that they would not otherwise have to pay tax on, prior to the implementation of the TCJA. GILTI applies to CFC and Forms 8992 and schedule I-1 of the Form 5471 are applicable to reporting.

Subpart F

The Subpart F tax regime is used to ensure that certain passive income and other income generated from Controlled Foreign Corporations is taxed in the US. US shareholders may have to pay a tax on their prorated share of current year earnings and profit despite none of the income being actually distributed to the taxpayer. 

Penalties

The penalties for not filing Form 5471 correctly can be tough. They start out at $10,000 and go up exponentially from there — depending on how many Form 5471s a taxpayer may have to file, how late in the year they file, and how many years they are non-compliant. It should be noted that the Form 5472 which is primarily for foreign persons with an interest in US corporations, started at a $10,000 penalty and a few years back jumped up to $25,000 minimum penalty — so enforcement is on the rise.

Automatic Assessed Penalties

In recent years, the Internal Revenue Service has taken to issuing automatic assessed penalties for the failure to file Form 5471. Taxpayers will usually receive a CP-15 notice that identifies the code section and the amount of the penalty. Generally, the taxpayer has 30 days to respond to try to get the penalty waived and time is of the essence.

Reasonable Cause and Amnesty

Just because a person is out of compliance for not filing the form 5471 does not mean they will be penalized. The Internal Revenue Service has developed the various offshore voluntary disclosure tax amnesty programs to assist non-willful taxpayers with safely getting into compliance before penalties are issued. Some taxpayers may qualify for a complete penalty waiver, while other taxpayers are required to pay a much reduced 5% penalty.

If a taxpayer cannot qualify as non-willful, they may still qualify for the voluntary disclosure program although the penalties can be significantly higher.

Beware of Increased Form 5471 Enforcement

In conclusion, the Form 5471 is an important international information reporting form. The form can be very complicated depending on what category of filer the taxpayer qualifies as, and due to the number of schedules, it can be a time-intensive and laborious  undertaking. In recent years, the IRS has begun issuing automatic assessed penalties for the failure to file the Form 5471, but there are various amnesty programs to assist taxpayers with safely getting into compliance.

International Tax Law Firm: Meet our Attorneys

Our International Tax Law Firm specializes exclusively in U.S. & international tax, and specifically IRS disclosure & compliance with Form 5471 delinquent filing/penalty abatement.

Contact our firm today for assistance.