Internal Revenue Service Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, has been in existence for many years. However, it has gained significantly more importance after the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 and the Tax Cut and Jobs Act of 2017. Form 5471 is an informational return, not a tax return. Certain U.S. persons, who are officers, directors, or shareholders in certain foreign corporations are required to file Form 5471.
On its face, Form 5471 is similar to a U.S. corporate income tax return (Form 1120) but for foreign corporations and requires reporting of much of the same information, such as an income statement and balance sheet. This Form contains important disclosure information and, in many cases, includes relevant information to determine the current U.S. tax liability of the U.S. shareholder of the foreign corporation.
Who should comply?
Any U.S. “person” (individual, entity (corporation, partnership, trust, or estate)) who owns more than 10% (vote or value) of a foreign corporation will likely be required to file Form 5471. The form is filed as part of the U.S. person’s tax return (Form 1040, 1065, 1120, etc.) and is due when the income tax return is due including any extensions. A separate Form 5471 filing is required for each applicable entity interest, based on the category of filer.
The filing requirements are assigned to five categories of filers.
Category # 1 – Repealed.
Category # 2 – This includes any U.S. citizen or resident who is a director or officer in a foreign corporation and meets the 10% stock ownership requirement
Category # 3 – This includes any U.S. citizen or resident who acquired additional stock to meet the 10% stock ownership requirement or disposed of stock in a foreign corporation to reduce their ownership below the 10% stock ownership requirement.
Category # 4 – Any person having more than 50% stock ownership (by vote or value) in a foreign corporation during the annual accounting period of a foreign corporation
Category # 5 – Any person who owns 10% stock in a Controlled Foreign Corporation (CFC) during any tax year of the foreign corporation.
Fines & Penalties
Failure to file (or incomplete filing) of Form 5471 is subject to significant penalties as follows:
- A $10,000 penalty is imposed for each annual accounting period of the foreign corporation for failure to furnish the required information
- The penalties can go up to a maximum of $60,000 if filing requirements are not complied within 90 days of such notice from IRS
- Additionally, the IRS may reduce the foreign taxes available to be claimed as a foreign tax credit.
Note that there is no exemption from filing for U.S. taxpayers living abroad.
Are you impacted?
Scenario # 1 – A U.S. person acquires 5% ownership interest of a foreign corporation. He has not owned any shares in the foreign corporation previously.
Result: There is no Form 5471 filing requirement.
Scenario # 2 – Similar facts as above but now the U.S. person purchases additional 6% ownership interest in the corporation. This increases his total interest to 11%.
Result: He will now be liable to file Form 5471 under Category 3.
Scenario # 3 – The U.S. person in scenario # 2 in the same year also becomes an officer/director in the foreign corporation.
Result: He will now be liable to file Form 5471 under Categories 2 and 3.
Scenario # 4 – The same U.S. person who was an officer/director purchases additional interest of 40% in the corporation on June 01, 20XX. The corporation is now a CFC.
Result: He will now be liable to file Form 5471 under Categories 2, 3, 4 and 5.
How to get compliant?
The above discussion is presented in summary form to explain the concepts behind Form 5471 filing. Please refer to the Form instructions for more specific information. For taxpayers who may be out of compliance with Form 5471 filing requirements, please contact our office to discuss remediation options.