Are you a U.S. shareholder of a foreign corporation?
If you have been diligently filing all your returns and disclosures, you may be familiar with Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Form 5471 an information returned filed along with the income tax return of covered individuals.
Generally, individuals who are U.S. citizens for tax purposes and who own at least ten percent in a foreign corporation may be required to file Form 5471.
Although this form has been around for years, there were significant changes in this form under the Tax Cuts and Jobs Act of 2017.
Here are some of the changes in the new form.
What do Form 5471 filing categories mean?
Form 5471 includes more filer categories. Here’s a summary of the categories for the Form 5471. You need to understand these categories to understand whether you have to file the form and how to complete the form.
This category includes any U.S. shareholder of a corporation classified as a Specified Foreign Corporation (“SFC”) anytime during the year as of the last day of the year that it was considered as an SFC.
This is for U.S. persons who serve as the director or officer of a foreign corporation in any of the following circumstances:
- a U.S. person acquired ten percent ownership either in value or vote
- a U.S. person acquired additional ownership of at least ten percent in value or vote during the tax year
This category is reserved for individuals who meet any of the following criteria:
- acquisition of at least ten percent in value or vote during the tax year.
- acquisition of stock by any U.S. person which brings total ownership in value or vote to ten percent
- any U.S. person who disposed of sufficient stocks in a foreign entity to reduce interest to less than ten percent
- anyone who becomes a U.S. person while meeting the ten percent ownership of a foreign entity
- a person treated as a U.S. shareholder with respect to the foreign corporation under section 953(c)
This category is for individuals who own more than fifty percent stake in a foreign corporation based on voting power or value of shares.
Category 5 is for US tax residents owning stocks in a foreign entity considered as a controlled foreign corporation (CFC) at any time during the tax year and who owned the CFC stock on the last day of the year.
Why should I determine the right category when filing Form 5471?
Your filing category will determine which schedules you need to enclose with the return. So, you need to make sure that you are filing the right schedules based on your category.
For instance, Category 2 filers only need to fill out the schedule on Page 1 above Schedule A and Schedule O, Part I. And Category 4 filers should submit all required schedules except Schedule O Part I and Part II. Confused yet?
How is the new Form 5471 different from the older version?
Form 5471 used to have eight pages, but the number doubled in the new form. The tax reform act requires more details about your earnings from foreign holdings.
There were also several changes in the information required in several schedules. Here’s a quick summary of some of those changes.
Part B of Form 5471 requested details about the foreign corporation’s direct shareholders. Now, you may also have to disclose indirect ownership and ownership by a foreign disregarded entity.
In Schedule C, you have to include both realized and unrealized foreign currency gains and losses. Meanwhile, Schedule G now requires you to answer 19 questions instead of eight. You also need to disclose dollar amounts for items like intangibles, and foreign taxes, among others.
For Schedule G, you need to compute shareholder inclusion to comply with the Global Intangible Low Taxed Income provision.
Schedule J, in particular, requires more details about items like Earnings & Profit.
Are There Exceptions to Filing Form 5471?
Yes, there are exceptions. The form 5471 does not always have to be filed. You may be exempt from filing Form 5471 if you are:
- a shareholder of a foreign insurance company that elected to file a U.S. tax return and be treated as a domestic corporation during the tax year
- a U.S. person with constructive ownership in a foreign corporation
Multiple Form 5471 filers who need to furnish the same information for the same company for the same period may also file a joint return. In this case, you may attach Form 5471 to any of the returns filed except if you are in Category 3.
For Category 3 filers, the form should be attached to the return of the person having equal or greater interest based on value or voting power.
Are there penalties for non-filing Form 5471?
Form 5471 is an information return, not a tax form, but non-filing could lead to hefty penalties.
Late filing, non-filing or inaccurate forms will cost you $10,000 each year for every foreign corporation. When you fail to submit the form within 90 days after the IRS sends you a notice, the agency may charge an additional $10,000 penalty for each foreign corporation.
Since there is a maximum additional penalty of $50,000 for each failure to file, penalties for each failure can be as high as $60,000.
Aside from getting fined, your foreign tax credits may also be reduced by ten percent. If you fail to file within 90 days from the date you receive the notice, your foreign taxes eligible for credit will be reduced by another 5%, bringing the total penalty to fifteen percent.
That’s not all. Your returns will also be open for audit indefinitely if you fail to file Form 5471.
Tax Guidance Highly Recommended
Form 5471 is harder than most other tax-related tasks you need to deal with. And with the changes in reporting requirements, Form 5471 became even more complicated. Combined with its onerous requirements, it’s easy to commit mistakes when filing this form.
Given the complexity involves, it’s better to seek professional help if you are required to file Form 5471. Give us a call and we can assist with this.