WHAT IS FORM 5471?
IRS Form 5471 is an information return (as opposed to a tax return) for certain U.S. taxpayers with an interest in certain foreign companies or corporations. Form 5471 is officially called the Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
WHAT IS A CONTROLLED FOREIGN CORPORATION (CFC)?
Where U.S. shareholders hold more than 50% stock ownership in a foreign entity, that foreign entity will be regarded as a controlled foreign corporation (CFC) for U.S. Federal Income Tax purposes. The income of a CFC is referred to as subpart F income and subpart F income is dealt with separately by the IRS in terms of taxation.
The IRS defines a foreign corporation as being U.S. controlled if:
“more than 50% of the total combined voting power of all classes of stock of such corporation entitled to vote, or more than 50% of the value of all its outstanding stock, is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the foreign corporation’s tax year.”
If the above definition applies to you, you might also be liable for the Global Intangible Low-taxed Income (GILTI).
HOW DO I DETERMINE MY COMPANY STRUCTURE?
If you followed our series on Entity Classifications, this should be quite easy for you. However, those who have not had a chance to look at it might find it a bit more complex. The most important thing to remember is that the classification or foreign tax implications of your entity in the foreign country will not automatically be the same classification for U.S. Federal Income Tax purposes. Should your entity not be classified as a corporation in the foreign country, it might still be classified as a corporation for U.S. Federal Income Tax purposes.
For purposes of Form 5471, the IRS classifies international business companies and foreign liability companies (LLCs) as corporations.
In terms of the Check the Box (CTB) regulations, certain foreign companies, however, have the ability to elect its status as a “disregarded entity” by filing Form 8832 within 75 days of the company’s creation to avoid the Form 5471 reporting requirements.
The main difference is that Form 5471 is filed by a U.S. taxpayer, while Form 5472 is filed by any foreign company engaged in a U.S. trade or business or a U.S. corporation that is 25% foreign owned.
WHO FILES FORM 5471?
U.S. citizens, corporations, partnership, trusts, or estates who have at least 10% ownership in a foreign company should file form 5471. Generally, all U.S. persons or U.S. taxpayers described on pages 3-5 on the instructions for Form 5471 must complete the schedules, statements, and/or other information requested in the Form.
There are five (5) different categories, and some categories can be further broken down into subcategories. I have summarized the categories below and recommend that you should still refer to the instructions for Form 5471 for the detailed instructions.
CATEGORY 1 (U.S. SHAREHOLDERS)
This is usually regarded as the most common category. It primarily relates to shareholders of foreign corporations who meet the 10% threshold requirement, however, also extends to other specific situations.
CATEGORY 2 (OFFICER OR DIRECTOR WITH AN INVESTOR WHO IS A U.S. PERSON)
Also, relatively common, and primarily relates to shareholders of foreign corporations who are directors or officers and in which a U.S. person has an interest or stake in.
CATEGORY 3 (ACQUISITION OF ADDITIONAL STOCK)
This category includes:
- A U.S. person who acquires stock in a foreign corporation and when added together with other stock meets the 10% threshold, or without regard to acquisition of additional stock already owns 10%.
- A person treated as a U.S. shareholder in terms of section 953(c).
- A person who becomes a U.S. person while meeting the 10% threshold. Or
- A U.S. person who disposes of stock in the foreign corporation to reduce the threshold to below 10%.
CATEGORY 4 (CONTROL TEST)
This includes a U.S. person who had control of a foreign corporation during the annual accounting period of the foreign corporation.
A U.S. person has control if at any time during the tax year, it owns stock that is –
- More than 50% of the total combined voting power of all classes of stock of the foreign company entitled to vote, or
- More than 50% of the total value of shares of all classes of stock of the foreign company.
CATEGORY 5 – (CFC)
This includes a U.S. shareholder who owns stock in a foreign company that is a CFC at any time during any tax year of the foreign company and who owned that stock on the last day in that year on which it was a CFC.
FORM 5471 FILING REQUIREMENTS
As we briefly outlined above, there are five major categories of U.S. persons that are required to file Form 5471. The Form has multiple schedules or parts; which of those the filers must complete depends on which category is applicable. If the filers are in more than one category, they must complete each schedule or part for the categories.
At page 5 of the instructions to form 5471 is a table with a summary of the reporting requirements depending on which category filer you are.
FORM 5471 FILING INSTRUCTIONS
The IRS has made the filing instructions for Form 5471 unnecessarily complex, especially in trying to determine the different categories of filers and who needs to file what schedules. The filing instructions for Form 5471 can therefore be quite intimidating for a taxpayer. It is recommended to have a tax professional with experience in Form 5471 assist you with this and your tax return.
WHERE SHOULD IT BE FILED?
Form 5471 should be filed as an attachment to the taxpayer’s federal income tax return, partnership or exempt organization return, and filed by the due date (including extensions) for that return.
WHAT INFORMATION IS REQUIRED?
You should supply the IRS with the corporation’s income statement, balance sheet, and data on its loans, operations and other shareholders.
The form also requires information on dividends and managerial payments made to shareholders, officers and directors. The financial information must be presented using U.S. generally accepted accounting principles (U.S. GAAP) which generally differ from those used to produce foreign financial statements. Hence why it is recommended to have a tax professional assist you with the process to ensure that the income statement, balance sheet etc. is processed in the required manner.
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 keeping time and the time required to learn about the relevant law and the instructions. The learning time could be much longer for someone who is not familiar with the pertinent sections of the tax law. However, for an operating business with extensive transactions, it could take much longer and for a CFC that is owned by one person and used as an investment entity, it could take as few as five hours by someone familiar with the form. It might only take an hour or two to prepare the form for a dormant foreign corporation.
FORM 5471 SCHEDULES TO KNOW
Within Form 5471 there are various schedules you may or may not need to fill out. They are:
- Form 5471 Schedule A – Stock of the Foreign Corporation
- Form 5471 Schedule B – U.S. Shareholders of Foreign Corporations (for example are they U.S. citizens etc.)
- Form 5471 Schedule C – Income Statement
- Form 5471 Schedule E – Income, War Profits, and Excess Profits Taxes Paid or Accrued
- Form 5471 Schedule F – Balance Sheet
- Form 5471 Schedule G – Other information
- Form 5471 Schedule H – Current earnings and profits
- Form 5471 Schedule I – Summary of Shareholder’s Income from Foreign Corporation
- Form 5471 Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations
- Form 5471 Schedule M – Transactions between controlled foreign corporation and shareholders or other related persons
- Form 5471 Schedule O – Organization or reorganization of foreign corporation, and acquisitions and dispositions of its stock (Part I to be completed by U.S. officers and directors, Part II to be completed by U.S. shareholders)
WHEN IS IT DUE?
Form 5471 is due with the income tax return of the affected shareholder for the current year. For most corporations, that would be March 15th or the extended due date for the current year. For most individuals, that would be April 15th or the extended due date for the current year.
WHAT HAPPENS IF YOU DON’T FILE FORM 5471 OR FILE IT LATE?
The penalties for failing to file this form with your income tax return 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 as an attachment to your income tax return. The penalties may be waived by the IRS on a showing of reasonable cause for failing to file the form. If the taxpayer is notified by the IRS of a duty to file, the penalty is $10,000 per month up to a maximum of $50,000. There are additional penalties that are described in the instructions to the form.
HOW TO GET COMPLIANT?
Depending on the circumstances, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs. For taxpayers who are looking to get compliant, please contact Asena Advisors to discuss the remediation options available to you.
SHOULD A U.S. CORPORATION WITH NET OPERATING LOSSES STILL BE CONCERNED?
Many U.S. companies have accumulated significant Net Operating Losses (NOLs) due to the COVID-19 pandemic. Companies need to be aware that significant NOLs will not protect them from potential problems with the IRS. This is mainly due to Form 5471 being an information return and not a tax return. The failure to file Form 5471 results in a penalty and not a tax.
WILL FORM 5471 IMPACT MY U.S. TAX LIABILITY?
Form 5471 could potentially impact your U.S. tax liability. The most common situation is U.S. shareholders of foreign corporations being taxed on their dividends in the year of receipt and deferring any unpaid earnings and profits until they are distributed or until the company is liquidated.
As we know, the IRS has many complex tax laws in place to prevent taxpayers from setting up an offshore company simply to avoid U.S. tax. It is therefore extremely important to consider the type of income that the foreign company receives as well as its source. Several types of income are labelled by the IRS as subpart F income. Subpart F income will likely end up as taxable income to the U.S. owners, irrespective of whether it was distributed as dividend or not.
QUESTIONS AND ANSWERS ON FORM 5471:
What is Form 5471 used for?
Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to satisfy the filing requirements of sections 6038 and 6046, and the related regulations, as well as to report amounts related to section 965.
Do I need to file 5471 every year?
The Category of Filer(s) will determine the Form 5471 filing requirements’ frequency and timing. For example, a Category 5 Filer must file IRS Form 5471 every year.
Does TurboTax have Form 5471?
No. Most tax programs do not include IRS Form 5471. This is mainly due to the limited applicability of the IRS Form 5471 Information Return of U.S. Persons to taxpayers.
When did Form 5471 start?
Many of the changes related to international reporting, as well as an increase in the IRS’s ability to obtain information relating to foreign activities, stem from the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Tax Haven Report of 1982.
The IRS implemented the recommendations of the Tax Haven Report of 1982 with the introduction of the 5471 Form, Information Return With Respect to a Foreign Corporation, in March of 1983 (the title of the form was changed to Information Return of U.S. Persons With Respect to Certain Foreign Corporation in 2018).