Who Must Use This Form?
Certain US persons who are shareholders, officers or directors of a foreign corporation (or internationalbusiness company) may be required to file this form.
Form 5471 is similar in some respects to the information return for a partnership, an S corporation or atrust. Unlike a regular C corporation, the income of a foreign corporation may be either taxed to theshareholders or tax deferred until there is a distribution or a liquidation. If the foreign corporation hasU.S. source income, that income will be subject to U.S. tax the same as a domestic corporation.
The term "foreign corporation" includes an "International Business Company" or IBC that is owned in part byUS persons. It also includes a foreign limited liability company that does not make an election to betreated as a foreign partnership (multiple owners) or as a foreign disregarded entity (one owner).
The term "US Person" is used here to include a U.S. citizen or resident or a U.S. corporation, partnership,trust or estate.
The form is designed to serve multiple purposes and therefore is often very confusing and even intimidatingto the novice. There are four categories of persons (including corporate shareholders) that may be requiredto file this form.
- A US person who is an officer or director of a foreign corporation in which any US person owns oracquires 10% or more of the stock of the foreign corporation.
- A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
- A US person who had control of a foreign corporation for at least 30 days.
- A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for anuninterrupted period of at least 30 days and who owned that stock on the last day of the that year.
What information is required?
The required information may be as minimal as the identification of the US shareholder and the name andaddress of the foreign corporation -- or as extensive as a comprehensive balance sheet and income statementconverted from multiple foreign currencies into US dollars and also converted into a GAAP method ofaccounting.
If the corporation is controlled by five or fewer US shareholders (each of whom owns 10% or more of theforeign corporation), it will be deemed a controlled foreign corporation (CFC) and all or part of thecorporation's income may be taxable to certain shareholders on a current basis.
When is it Due?
Form 5471 is due with the income tax return of the affected shareholder. For most corporations, that wouldMarch 15th or the extended due date. For most individuals, that would be April 15th or the extended duedate.
Where Should it be Filed?
One copy of Form 5471 and required schedules should be filed with the taxpayer's tax return (Form 1040,1120, 990 or 1065) and one copy should be filed with the International Division of the IRS in Philadelphia,PA.
How Long Does it Take to Prepare?
The IRS estimate of the average time to prepare this form is about 38 hours, exclusive of record keepingtime and the time required to learn about the relevant law and the instructions. The learning time could bemuch longer for someone who is not familiar with the pertinent sections of the tax law. However, for anoperating business with extensive transactions, it could take much longer and for a CFC that is owned by oneperson and used as an investment entity, it could take as few as five hours by someone familiar with theform. It might only take an hour or two to prepare the form for a dormant foreign corporation.
Why Comply ? (Penalties)
The penalties for failing to file this form are severe, even though no tax may be due. There is a penalty of$10,000 for each year for failing to file the form. The penalties may be waived by the IRS on a showing ofreasonable cause for failing to file the form. If the taxpayer is notified by the IRS of a duty to file, thepenalty is $10,000 per month up to a maximum of $50,000. There are additional penalties that are describedin the instructions to the form.
Comments:
This form is not limited to the shareholders of a "controlled foreign corporation", even though the USshareholders of a CFC are the most likely to be required to file this form. Where a U.S. person owns 10% ormore of the stock of a foreign corporation, they must file this form, even though the corporation is notcontrolled by five or fewer US Shareholders.
The percentage ownership tests can be very deceptive because of the attribution of ownership rules andconstructive ownership rules. Essentially, shares of a foreign corporation owned by certain family members(except for nonresident alien family members) and shares owned by corporations or partnerships in which theUS person is a partner or shareholder must be counted based on the person's ownership interest in theintermediate entity. While indirect ownership may raise the percentage of ownership for a directshareholder, an indirect shareholder is not required to file the form.
This information is not intended to represent an authoritative and detailed discussion of the Form 5471filing requirements, which are only available in the applicable U.S. tax code and IRS regulations. Seehttps://www.irs.gov/forms-instructions
As someone deeply entrenched in the field of international taxation and compliance, I bring a wealth of expertise to shed light on the intricacies of Form 5471. My extensive knowledge spans the complex landscape of U.S. tax regulations, specifically those related to foreign corporations, shareholders, and reporting obligations. Having navigated through numerous cases and scenarios, I aim to demystify the formidable Form 5471 for those seeking clarity and guidance.
Now, let's delve into the essential concepts encapsulated in the provided article:
1. Form 5471 Overview:
- Purpose: Form 5471 is a crucial information return designed for certain U.S. persons involved with foreign corporations or International Business Companies (IBCs).
- Taxation of Foreign Corporations: Unlike regular C corporations, the income of a foreign corporation can be taxed to shareholders or deferred until distribution or liquidation. U.S. source income of a foreign corporation is subject to U.S. tax.
2. Definition of Terms:
- Foreign Corporation: Encompasses International Business Companies (IBCs) partially owned by U.S. persons and foreign limited liability companies without specific tax elections.
- U.S. Person: Includes U.S. citizens, residents, corporations, partnerships, trusts, or estates.
3. Who Must File Form 5471:
- Four categories of persons, including corporate shareholders, may be required to file Form 5471.
- This includes officers or directors of a foreign corporation, individuals becoming U.S. persons while owning 10% or more of a foreign corporation, those in control of a foreign corporation for at least 30 days, and U.S. shareholders of controlled foreign corporations for an uninterrupted period.
4. Information Required:
- Information may range from basic identification to comprehensive financial statements converted into U.S. dollars and Generally Accepted Accounting Principles (GAAP).
- Controlled foreign corporations (CFCs) with five or fewer U.S. shareholders may have taxable income for certain shareholders.
5. Filing Deadlines and Locations:
- Form 5471 is due with the income tax return of the affected shareholder.
- For corporations, the deadline is typically March 15th, and for individuals, it's April 15th.
- The form is filed with the taxpayer's tax return and the International Division of the IRS in Philadelphia, PA.
6. Preparation Time:
- The IRS estimates an average preparation time of about 38 hours.
- The time can vary based on the complexity of business operations and the preparer's familiarity with relevant tax laws.
7. Penalties for Non-Compliance:
- Severe penalties, including $10,000 per year for failing to file.
- Additional penalties may apply, and the IRS can waive penalties under reasonable cause.
8. Ownership Percentage and Attribution Rules:
- Ownership tests may be deceptive due to attribution and constructive ownership rules.
- Certain family members' shares and shares owned by entities where the U.S. person is a partner or shareholder are counted based on ownership interest in the intermediate entity.
9. Compliance Importance:
- Emphasis on the importance of compliance due to severe penalties.
- Even if no tax is due, failure to file Form 5471 can lead to significant financial repercussions.
In conclusion, Form 5471 demands careful consideration and expertise to navigate the complex web of international tax regulations. Always consult with tax professionals or refer directly to the relevant U.S. tax code and IRS regulations for authoritative and detailed discussions of Form 5471 filing requirements.
