Who Should File Form 5471?
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is an international information return that may be required to be filed with the U.S. Internal Revenue Service (“IRS”) by U.S. citizens and U.S. residents (including Green Card holders) who are officers, directors, or shareholders in certain foreign corporations.
Form 5471 and its attached schedules are used to meet the reporting requirements of Internal Revenue Code (“IRC”) Sections 6038 and 6046 and the corresponding Treasury regulations.
Although Form 5471 is only an information return, completing it accurately and completely is essential, as it is an important tool for the IRS to determine whether individuals or companies are complying with the Subpart F regime (an anti-deferral tax regime).
Form 5471 is required to be filed by U.S. persons (U.S. citizens, U.S. residents and Green card holders) who have a specific level of ownership (including direct, indirect or constructive ownership) or control in certain foreign corporations, including:
- U.S. citizens or residents who are officers, directors of a foreign corporation;
- U.S. domestic corporations;
- U.S. domestic partnerships; and
- U.S. domestic trusts.
The Instructions to Form 5471 have several categories of filers. A determination of who falls within a specific filer category (sometimes, more than one) is complex and not always straightforward. Taxpayers should carefully review the instructions to Form 5471 or talk to their qualified U.S. tax professionals. Ideally, taxpayers should find someone knowledgeable about U.S. international tax.
Filing Guidelines For Form 5471
When do I need to file? Form 5471 must be attached to the taxpayer’s tax return and filed by the tax return filing due date (including extensions). For example, Form 1040, U.S. Individual Income Tax Return for the 2017 tax year will be generally due by April 17, 2018.
What do I need to provide? In the instructions to Form 5471, depending on the category of the filer, the taxpayer will need to provide the following information to the IRS (note that penalties equally apply for substantially incomplete forms):
- Identifying information for the U.S. shareholder and the foreign corporation;
- The corporation’s income statement;
- Balance sheet;
- Computation of earnings and profits;
- Details of any Subpart F income;
- Information on dividends paid;
- Transactions between the corporation and U.S. shareholders, and other related persons; and
- Detail of any organization or reorganization of the corporation’s stock.
A simplified filing of Form 5471 is allowed for certain dormant foreign corporations.
The financial information required by the IRS must be presented using the U.S. generally accepted accounting principles (“U.S. GAAP”) which may differ from the accounting principles used to produce foreign financial statements; therefore, the taxpayer is required to convert any financial statements to U.S. GAAP.
Penalties for Not Filing Form 5471
The penalties for not filing Form 5471 are substantial. Importantly, the IRS assesses them automatically. It is important to ensure that Form 5471 is timely filed and substantially complete because the taxpayer may be subject to a US $10,000 penalty for each year the taxpayer is required to file, but failed to file or filed late. The amount of penalties may be higher, depending on the number of forms. Additional penalties of up to US $50,000 are assessed for instances of continued failure to file after the IRS mailed the Taxpayer a notice and non-compliance continues.
A person who fails to report the required information timely may be subject to a reduction of 10 percent of the foreign taxes available for credit under IRC Sections 901, 902 and 960. Continued cases of failure are also subject to an additional reduction of 5 percent for each three-month period. Criminal penalties may also apply for failure to file the required information.