Five Things You Need to Know About Form 5471

United States citizens or residents who are shareholders, directors, or officers in some foreign corporations are required to file Form 5471. For those who own more than 10% of the shares of a foreign corporation, Form 5471 is filed with your tax return. The guidelines and rules to file Form 5471 can be difficult to understand on your own. Also, it will carry a significant penalty if the form was not filed in a timely manner.

Form 5471

In this article, we discuss five things you need to know about filing Form 5471:

  1. What’s Form 5471?
  2. Form 5471 filing process.
  3. Form 5471 filing requirements.
  4. Form 5471 filing deadline and penalties.
  5. Form 5471 filing instructions.

What’s Form 5471?

Americans living abroad are responsible to file 5471 form along with United States expat tax return Form 1040. Form 5471 is an information return for individuals regarding some specific controlled foreign corporations. US citizens or green card holders living in the United States, and if you live abroad or even qualify for the Foreign Earned Income Exclusion (FEIE) and owe a 10% of a foreign corporation, you are required to file Form 5471.

Form 5471 required to be filed with the IRS is not a tax return but rather an information return. This is something the IRS uses to keep a record of which USA individuals own foreign corporations. Furthermore, it prevents people from hiding assets from the IRS. In other words, the form itself does not represent an obligation to pay the United States government, besides the penalties for not filing the form or filing it incorrectly.

Form 5471 Filing Process

Form 5471 must be filed together with your regular 1040. This applies to United States residents and citizens, whether they are directors, officers, or shareholders in some foreign corporations. While this is just information return, it must be filed accordingly, and the activity of the foreign corporation must be included. This is an important piece of information to help the IRS determine when a company needs auditing or is subject to Subpart F income.

Some types of income (known as Subpart F Income) may be taxed and flow through the United States shareholders. Taxes on this income would be paid on their personal tax returns. However, the rules to decide which types of income are categorized as Subpart F, are a bit complex. All corporate incomes may be treated as Subpart F income. For example, corporate income may include interest, dividends, insurance income, rental income, personal service income, and offshore shipping income.

As mentioned before, Subpart F income is taxable on the USA shareholder’s personal 1040 tax return or corporate return if a United States corporation is the owner during the year it happened as ordinary income, which happens even when the income was distributed.  A reduced qualified dividend rate may be available to shareholders of Foreign Corporations, which is the same rate as capital gains if paid by the foreign corporation located in a country that has a treaty with the United States.

If you fail to file Form 5471, you will have to pay a penalty, not a tax. The three-year statute of limitations applicable to normal tax returns is valid until Form 5471 is filled correctly.  Also, your personal tax return is incomplete until you file Form 5471.

Form 5471 Filing Requirements

Individuals who have a certain degree of control in some foreign corporations have certain filing requirements. The following circumstances require Form 5471:

  • The U.S. individual became the director of the foreign corporation.
  • The U.S. individual acquires an ownership interest in a foreign corporation more than the specified limits.
  • A U.S. person disposing of stock in a foreign corporation that helps reduce the interest in the foreign corporation to less than the established limit.
  • U.S. individuals in control of a foreign corporation for an uninterrupted period of at least 30 days during the year.
  • A U.S. person who is 10% or more shareholder in a foreign corporation categorized as a “controlled foreign corporation” for an uninterrupted period of time of at least 30 days a year and that individual still owns the stock by the last day of the year.

When calculating the ownership, there are complex rules of direct, indirect, and constructive ownership to consider, including schedules, and relevant information when filing Form 5471. This is a complex form to file without the assistance of an experienced tax accountant. Forms and attached schedules are used to meet the requirements for reporting transactions carried out between U.S. individuals and foreign corporations. Significant penalties are due when failing to file Form 5471. Make sure you seek help from a qualified professional.

Form 5471 Filing Deadline And Penalties

You will find Form 5471 attached to your income 1040 tax return, which must be filed by the due date, including extensions for tax return.

Penalties for not filing Form 5471 can be substantial with a $10,000 or more for every year the form was not filed. Further, other penalties of up to $50,000 can be charged for occurrences of sustained failure. Individuals who fail to report the necessary information within the established timeframe will have a 10% reduction of foreign taxes available for credit. Cases that continue to fail are subject to further reductions. Some criminal penalties may be applied when the information filed is not accurate.

Whether you are directly or indirectly engaged in a foreign corporation, as described above, contact My CPA, PA to decide whether you have any filing obligations. Also, if Form 5471 is not filed, Form 1040 is deemed as being non-filed by the IRS, which leaves your individual return open for penalties or audits indefinitely. 

Form 5471 Filing Instructions

Filing Form 5471 can be an overwhelming process. The instructions are unreasonably complex. In particular, determining the category of the filer as well as who and what schedules must be filed is confusing. Based on instructions, it will take approximately 32 hours to complete it. You will be required to provide the IRS with the corporation’s income statement, balance sheet, and data on its loans, operations, as well as shareholders. Information about dividends and managerial payments made to directors, officers, and shareholders are essential.  Also, the financial information must present US accounting principles (U.S. GAAP). These are different from those used to create foreign financial. As a result, there is specific work necessary when converting financial statements to the required format.

 We Can Help

If you own part of or all the foreign corporation and have not filed Form 5471, we advise you to contact a CPA or Tax Attorney as soon as possible to avoid the $10,000 penalty.  You may qualify for the following programs: 1) The Streamlined Disclosure or 2) Traditional Voluntary Disclosure  Program. 

In the past, it was difficult to obtain ownership information regarding foreign corporations. This is going to be much easier in the future. Currently, the IRS is getting more involved in getting information about U.S. citizens overseas via FATCA and other methods. In addition, many US-foreign country tax treaties deliver full cooperation between the two nations regarding tax information exchange on citizens residing in each.

For more information regarding the Foreign Corporation information return, contact your local CPA My CPA, PA. We’ll schedule your consultation with a tax accountant.

Legal Disclaimer

Information only / No Legal Advice Intended

This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or another advisor regarding your specific situation.

To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Always seek advice based on your particular circumstances from an independent advisor. Any disclosure, copying, or distribution of this material, or the taking of any action based on it, is strictly prohibited.

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