IRS Form 5471 with Examples: Foreign Corporations

IRS Form 5471 with Examples: Foreign Corporation Reporting

IRS Form 5471 with Examples

IRS form 5471 is one of the most complicated international information reporting forms that some U.S. Taxpayers may have to file each year. Unlike some of the more common IRS foreign tax forms such as the FBAR, Form 8938, and Form 3520, Form 5471 typically requires a significant amount of detail — especially when the Taxpayer is a shareholder in a Controlled Foreign Corporation. In years past, Form 5471 was always a complicated tax form, but with the creation of the Tax Cuts and Jobs Act (TCJA), the introduction of the Expatriation Tax Act (Section 965), and GILTI (Global Intangible Low Tax Income) an already complicated IRS tax form became even more complex and convoluted. It is also important to note that in addition to the main form and main form schedules, Taxpayers may also have to prepare additional separate schedules — depending on whether issues such as Subpart F and GILTI apply. From a baseline perspective, the most important first step for most Taxpayers is to recognize whether they must file Form 5471 at all — and then they can determine whether they think they can tackle the issues themselves. Many Taxpayers will be able to navigate through Form 5471 — especially if the foreign corporation is not a controlled foreign corporation and/or if the corporation operates in a high-tax jurisdiction.  Let’s work through some common examples.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Relocated to the United States

Moving to the United States can be a catalyst for filing Form 5471 — although which category(s) they have to file for may depend on several factors, such as whether or not the Taxpayer is only coming to the United States for the first time or whether they are returning to the United States when they were previously U.S. persons. Further complicating the matter is whether the business was in existence before the current year, what percent ownership the Taxpayer has — and whether the company is a Controlled Foreign Corporation:

• • • Example: Sam became a U.S. person and is a 100% owner of a foreign company. The company is considered a controlled foreign corporation since Sam is a U.S. shareholder and U.S. shareholders in total own more than 50% of the company. Sam may have to file a form 5471.

    • Example: Samantha became a U.S. Person but still has family members overseas. Her grandma decided to distribute shares of her foreign company to her grandchildren and Samantha receives a 14% ownership in the foreign company. Samantha may have to file a Form 5471.

    • Example: Scott relocated to the U.S. and has 15% ownership in a foreign company owned more than 50% by U.S. persons. Scott had control of the company in the current year and the foreign corporation runs on the same tax year as Scott. He may have to file a Form 5471.

Company Formation (Disregarded Entity/Per Se Corporation)

One common situation in which a U.S. Taxpayer may have to file Form 5471 is when a U.S. person forms a foreign corporation. This will  depend on what type of foreign corporation it is, whether the Taxpayer makes any elections, and whether the company is a controlled foreign corporation:

• • • Example: Peter is a U.S. citizen who formed a single member LLC equivalent in a foreign country. The foreign entity is disregarded abroad and for U.S. tax purposes would also be disregarded — under the default provisions for foreign entities. Peter may not have to file a Form 5471 and instead file Form 8858 (although he may need to attach certain Form 5471 schedules in addition to his 8858 filing).

    • Example: Paul is a U.S. citizen who formed the Canadian corporation in order to manage his investments overseas. Even though Paul is the only owner of the Canadian corporation, since the corporation qualifies as a per se corporation, Paul is unable to disregard the entity and may have to file Form 5471.

    • Example: Penelope is a U.S. citizen who formed a foreign corporation with several other members. It is not a Controlled Foreign Corporation, and Phil only owns 8% of the company (attribution and constructive ownership rules would not apply because no other family members have ownership of the foreign corporation). Penelope may not qualify to have to file a Form 5471 and instead would File a Form 8938 — the latter which is much simpler than the Form 5471.

Increased or Reduced Ownership

If a Taxpayer increases or decreases their ownership in a foreign corporation, it may lead to having to file Form 5471. A key issue is whether or not the 10% threshold was met in either direction or not:

• • • Example: Daniel recently became a lawful permanent resident and previously to becoming a U.S. person owned 16% of a foreign corporation. Since Daniel became a U.S. person while meeting the 10% stock ownership requirement, he may have to file Form 5471.

    • Example: David is a U.S. citizen who previously owned 18% of a foreign corporation. In the current year, David decided to gift 9% of the company to his brother so that he now only owns 9% of the stock. Since David reduced his stock ownership to less than 10%, he may have to file a Form 5471 to report this reduction in ownership.

    • Example: Drew is a U.S. person who was a 6% owner of a foreign corporation but in the current year received a 5% stock gift from his father so now he owns 11% of the foreign corporation. Drew may have to file a Form 5471 to report this increase in ownership.

PFIC/CFC Crossover

As if the controlled foreign corporation rules are not complicated enough, the reporting and tax complexities can become infinitely more difficult when the foreign corporation that qualifies as a controlled foreign corporation also qualifies as a Passive Foreign Investment Company. This is because there are overlapping issues involving both Subpart F income and potential PFIC excess distribution calculations on the same income. The rules are very nuanced and Taxpayers who may have a PFIC that also qualifies as a CFC should be careful to review the rules carefully to determine if they meet any of the exceptions or exclusions. In general, the CFC rules will trump the PFIC rules.

GILTI and Subpart F Exceptions

Some Taxpayers may not receive any distributions from a Controlled Foreign Corporation but may have income that qualifies as Subpart F income or Global Intangible Low Taxed Income – which may result in tax implication even though no income was received. Even if the Taxpayer has Subpart F income or GILTI, they may qualify for an exception, such as the high-tax jurisdiction exception.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of Form 5471 reporting. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.