Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is a tax form required by the Internal Revenue Service (IRS) for certain U.S. persons who have an ownership interest or control in a foreign corporation. The form is used to report information about the foreign corporation, including its income, assets, and financial activities, as well as to calculate any taxes owed by the U.S. person on their share of the foreign corporation’s earnings. We are one of the few tax preparation firms that are real experts in this field and can help you prepare Form 5471. The article below provides more information on this issue.
What information must be provided?
The required information starts by listing the identity of the US shareholder and details about the foreign corporation. It must also include data on transactions between you and the foreign corporation, original capital contributions and other relevant data. It is 4 pages long. Several other schedules are required, which can make it a total of 6-7 pages. Among the schedules to be completed are the balance sheet for the corporation and the income and expense sheet for the current year of operation.
Depending on which of the five categories apply to the taxpayer (in fact, there are four categories because category one has just been repealed), different schedules must be completed. An officer or director of a CFC who is not an owner of the CFC will be required to file under category 2 where certain U.S. persons have acquired additional stock in the corporation. A category two filer is only required to complete page one and schedule G. Where a U.S. corporation is the 100% owner of a foreign corporation that is not a Foreign Personal Holding Company (FPHC), the filer could be classified as a category 3, 4, or 5. Quite often, more than one category can be applied to one filer – all that applies must be checked, and required schedules for each category filed.
When is it due?
The form is due with the income tax return of the affected shareholder. For most corporations, that would be March 15th or the extended due date. For most individuals, that would be April 15th or, if you are an ex-pat, June 15th. This form is filed along with your personal tax return (or your business corporation / LLC tax return if it is the owner of the foreign corporation).
How long does it take to prepare?
The IRS estimates that it takes approximately 38 hours on average to prepare Form 5471 (aside from the record-keeping time and the time required to learn about the relevant law and instructions). The learning time could be much longer for someone who is not familiar with the pertinent sections of the tax law. IRS estimates that the average time required for record-keeping to prepare the form is 82.5 hours and that the average time required for learning about the form is 16 hours. And that does not include the separate time estimates for schedules J, M, N, and O.
What happens if you don’t file form 5471 or file it late?
The penalties for a failure to file the return are severe – and it is not necessary for the corporation to have any profits for the penalties to apply. A return must be filed even if there is no taxable income to report.
Until recently, it was rare even to get a response from the IRS about the filing, even in the event that the form was filed late. However – as of late, the IRS has been vocal about the automatic penalties assessed by the computer for late filing of Form 5471. The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471.
You must remember that this is mostly an informational form, that does not result in any tax due for the taxpayer. So the $10,000 penalty is a “disclosure penalty”, unrelated to the actual tax consequences of the information provided on Form 5471. If the failure continues for more than 90 days after the date the IRS mails notice of failure, an additional $10,000 penalty will apply for each 30-day period. The additional penalty is limited to a maximum of $50,000.
Here is the scanned copy of an official IRS letter informing its recipient about the $20,000 Penalty Assessment for “Failure to File Form 5471”: Scan of IRS Letter About Form 5471 Penalty
Controlled foreign corporation
If you, along with other US persons, own more than 50% of a foreign corporation, it is then defined as a Controlled Foreign Corporation (CFC). Then certain types of income (called Subpart F Income) may be taxed and flow through to the US shareholders. This would cause them to pay tax on that income on their US personal tax returns. The rules for determining which types of income are considered Subpart F are rather complex.
Any type of corporate income such as dividends, interest, rental income, insurance income, offshore shipping income, and personal service income under certain conditions may be treated as Subpart F income. Subpart F income is taxable on the US shareholder’s personal return (or corporate return if a US corporation is the owner) in the year it occurs as ordinary income. This happens regardless of whether the income was distributed.
Dividends paid to shareholders of Foreign Corporations are occasionally eligible for a reduced qualified dividend rate (same rate as capital gains) when paid from the foreign corporation located in a country with which the US has a tax treaty.
Should a US corporation with net operating losses still be concerned?
With the current tough economic climate, many US companies have accumulated significant Net Operating Losses (NOLs). Therefore, their managers may not be concerned about the filing of Form 5471 – since they expect that the firm’s NOLs would protect them from potential problems with the IRS. However – because the failure to file Form 5471 results in a penalty (and not a tax), NOLs would not offer any protection.
In addition, the three-year statute of limitations that applies to normal tax returns (we discuss it in more detail here: Statute of Limitations for Tax Returns) does not start counting until Form 5471 is properly filed. This is because failure to file Form 5471 renders the personal tax return incomplete at the time of original filing.
Other Forms Related to the Foreign Corporation with Subsidiaries
• U.S. Federal Income Tax Compliance: Foreign-Owned Business [2 Forms 5472]
• U.S. Federal Income Tax Compliance: Foreign Subsidiaries [Form 5471]
• U.S Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI) [Form 8992]
• Section 250 Deduction for Foreign-Derived Intangible Income (FDII) [Form 8993]
• Foreign Tax Credit [Form 1118]
• Foreign Bank Account Reporting [FBAR]
• Quarterly federal and state estimated tax payments due throughout 2021 based on the safe harbor method
Conclusion
Preparation of Form 5471 is one of the most complicated and formidable challenges faced by tax preparers. Unfortunately, even most professionals do not know how to handle it and may require help. If you believe that you need assistance with this particular form, we would be glad to help out. Please contact us to find out how we can help.
