U.S. persons who invest in foreign activities often have U.S. reporting obligations. A common international reporting requirement for many U.S. persons is IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Very generally, this information return applies to U.S. persons who are shareholders, officers, or directors of foreign corporations. Whether the U.S. person has a filing obligation or not depends on whether that person also falls within a reporting category. Five key things you need to know about IRS Form 5471 are discussed more fully below.
Who Must File?
Only U.S. persons must file IRS Form 5471. These persons include U.S. citizens and residents e.g., “green card” holders or those who meet the substantial presence test”) as well as U.S. entities (e.g., U.S. partnerships, corporations, and trusts).
In addition to being a U.S. person, such person must fit within one or more reporting categories to have an IRS Form 5471 filing obligation. Although the reporting categories are complex, the more common ones relate to U.S. persons who have more than 50% ownership in a foreign corporation or who are officers and directors of these corporations. For example, a U.S. person who has 100% ownership in a foreign corporation throughout a tax year would fall within Category 5. In addition, because 100% owners are usually officers and directors of their own foreign corporations, these individuals sometimes fall within Category 2, which requires U.S. officers and directors to file an IRS Form 5471 when a U.S. person acquires 10% or more of the foreign corporation’s stock.
Because these reporting categories are complex, it is important to either consult the IRS Form 5471 instructions or to speak more with a tax professional.
What Is A Foreign Corporation?
For tax purposes, an organization may be characterized as a corporation, partnership, trust, or disregarded entity. All of these may be either domestic or foreign.
Certain foreign entities are treated as per se corporations under federal tax law. Even if the foreign entity is not a per se corporation, it may be treated as a foreign corporation if all of its members have limited liability, unless that entity has made an election to be treated differently for U.S. tax purposes. In turn, a member has limited liability if the member has no personal liability for the debts or claims against the entity through being a member. This determination largely depends on the law in which the entity has been organized.
Thus, to determine whether a U.S. person has an IRS Form 5471 filing obligation, the person will have to determine whether the foreign entity is a corporation for federal tax purposes, which requires an analysis of foreign law. This can sometimes be tricky, particularly if the entity is not a per se corporation.
How Do I File IRS Form 5471?
Unlike some other information returns, the IRS Form 5471 is filed with the U.S. person’s tax return. It is not a stand-alone return. Because the form must be filed with a tax return, it is considered late if filed past the U.S. person’s tax return deadline, including extensions.
What About Dormant Corporations?
Even U.S. persons who have dormant foreign corporations have an IRS Form 5471 filing requirement. In these instances, however, taxpayers may take advantage of a summary filing procedure, as set forth in Rev. Proc. 92-70. Therefore, U.S. persons who have created foreign corporations and not properly dissolved them under foreign law need to be careful that they continue to file the IRS Form 5471. Another easy solution to stop this reporting obligation is to simply dissolve the foreign corporation.
What Penalties Apply For Non-Filing?
Generally, there is a $10,000 civil penalty for the failure to file an IRS Form 5471. This civil penalty can be applied per year—i.e., if you failed to file IRS Form 5471 for three consecutive tax years, the IRS can impose $30,000 of civil penalties. There are also so-called continuation penalties that may apply if the IRS learns of the non-filing and sends a letter requesting the filing of the form. Specifically, if the taxpayer receives such notice and fails to file the IRS Form 5471 within 90 days, the IRS may impose additional $10,000 penalties for each 30-day period thereafter that the form is not filed (not to exceed $50,000).
Similar to many other international information returns, the statute of limitations also never runs if an IRS Form 5471 is not filed. Therefore, the IRS can assess additional income taxes against the taxpayer, even if the general 3-year statute of limitations period has expired.
The IRS has programs for taxpayers who have failed to timely file international information returns, including IRS Form 5471. The most common is the IRS Streamlined Filing Compliance Procedures. Generally, under these procedures, the taxpayer files several years of prior-year income tax returns and FBARs (if applicable). Depending on the residency of the taxpayer, a penalty may or may not be imposed on certain undisclosed foreign assets. In exchange, however, the IRS does not impose civil penalties for the late-filed information returns, including IRS Form 5471. There are also other advantages to the SFCP—if you have late filed Forms 5471 or other late-filed international forms, talk about this and other programs with your tax advisor.
Read the full article here
