Form 5471 – An Introduction
Certain U.S. individuals who own an interest in a foreign company may be required to report their interest to the IRS by including Form 5471 with their annual U.S. tax return. It is important to keep in mind that entities that are not considered corporations under foreign law may be considered corporations for U.S. tax purposes and thus may fall within the U.S. tax rules related to foreign corporations.
In general, Form 5471 assists the IRS with gaging the scope of a U.S. taxpayer’s foreign holdings that may facilitate U.S. tax deferral. The form is useful for keeping track of the earnings and profits of U.S.-owned foreign corporations, determining whether a foreign entity is a controlled foreign corporation (“CFC”) generating so-called “subpart F income” (generally passive-type income of a CFC that a 10% U.S. shareholder must include currently in gross income), and tracking possible IRC Section 956 inclusions (i.e., investments in U.S. property by CFCs that can trigger a current inclusion in a 10% U.S. shareholder’s gross income).
Who must file Form 5471?
As a general rule, Form 5471 is required to be filed when there is at least one 10% U.S. shareholder in the relevant foreign corporation.
The following is a brief description of the categories of taxpayers are required to file Form 5471:
Category 1 – This category has been repealed.
Category 2 – U.S. citizen or resident who is an officer or director, and a U.S. person has acquired stock that meets a 10% ownership requirement or a U.S. person has acquired an additional 10% of stock.
Category 3 – U.S. citizen or resident who acquires a 10% ownership interest, sells stock and drops below 10%, or becomes a U.S. person while owning 10%.
Category 4 – a U.S. person that had “control” of the corporation for at least 30 uninterrupted days during its taxable year. For this purpose, “control” is considered to be ownership of more than 50% of the foreign company while taking into account attribution rules.
Category 5 – a U.S. person who was a “United States shareholder” of a “Controlled Foreign Corporation” for at least 30 uninterrupted days, and who owned stock on the last day of the foreign corporation’s taxable year. A United States Shareholder is defined as a U.S. person owning 10% or more of the voting power of the corporation’s stock. (We note that starting with the 2017 tax year, the definition of “United States Shareholder” is expanded to include U.S. persons owning 10% or more of the total value of the corporation’s stock.) A CFC is defined as any foreign corporation where United States Shareholders own more than 50% of the vote or value of the corporation.
Special attribution rules (which include attribution between spouses and, in some cases, attribution from non-U.S. spouses) may apply to expand the scope of taxpayers that fall within these categories. It is important for U.S. individuals who own shares in a foreign corporation to determine if they fall into any of such categories.
What type of information is requested on the Form 5471?
The types of information requested include the following:
- Description of the stock of the foreign corporation
- Description of certain U.S. shareholders of the foreign corporation
- The foreign corporation’s income statement
- The foreign corporation’s balance sheet
- The foreign corporation’s current earnings and profits
- A summary of shareholder’s income from the foreign corporation
- Information regarding related party transactions
- Information regarding the organization or reorganization of the foreign corporation, and certain acquisitions and dispositions of its stock (Schedule O)
What is the due date for Form 5471?
Form 5471 must be attached to your income tax return and must be filed by the due date (including extensions) for that return.
What are the penalties for not filing Form 5471?
The following penalties, among others, may apply for failure to accurately file Form 5471 (or Schedule O to Form 5471, if required):
- Civil penalty of $10,000 for each year’s failure. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.
- 10% reduction in any foreign tax credits claimed from the relevant foreign corporation.
- Failure to file keeps the audit statute of limitations open indefinitely when information is required to be reported
- Criminal penalties may also apply in certain circumstances.