Dormant Foreign Corporation: Why & How to File Form 5471
Filing tax returns and forms can be overwhelming for people who are not into the details. In this article, you will find everything you need to know about Dormant Foreign Corporation, why filing Form 5471 is so important and what penalties apply for those who fail to file Form 5471.
What makes a foreign corporation dormant?
Every non-US corporation in which a U.S. person is involved in any capacity with at least 10% interest must be reported to the IRS. This is the way for the IRS to prevent the disguised accumulation of funds. It does not have to be completely inactive but activity should be contained below a certain de minimis level so the non-us corporation could be considered as dormant.
The list of conditions is outlined in Revenue Procedure 92-70 and also under sections 6038(a)(1), 6038(a)(4), or 6046(a)(3).
For purposes of this revenue procedure, a foreign corporation is a dormant foreign corporation if, at all times during the foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)):
(1) the foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;
(2) no shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;
(3) no assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;
(4) the foreign corporation received or accrued no more than $5,000 of gross income or gross receipts;
(5) the foreign corporation paid or accrued no more than $5,000 of expenses;
(6) the value of the foreign corporation’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;
(7) no distributions were made by the foreign corporation; and
(8) the foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.
Do foreign dormant corporations still have filing requirements?
Dormant foreign corporation alone makes the taxpayer liable for filing the personal tax return – even if taxpayer income is below the filing threshold. Form 5471 must be attached to a personal tax return (1040).
Procedure for summary filing per Rev. Proc. 92-70
- To elect the summary filing procedure, you as a filer must attach and file Page One of Form 5471 (the summary return) for each dormant foreign corporation with its regularly filed income tax return.
- The top margin of each summary return must be labeled “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”
- The summary return must be completed for the following filer items:
- the filer’s name and address
- identifying number
- filing category
- stock ownership percentage
- and tax year.
- The summary return must be completed for the following corporate items:
- the dormant foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2))
- name and address
- employer identification number (if any)
- country of incorporation
- and date of incorporation.
Risks of not filing 5471
Not filing Form 5471 at all, filing it inaccurately, or filing it late will lead to certain penalties.
The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471. If you didn’t send the form at all, the penalty will be also $10,000.
If you failed to file the form, the IRS will mail you a notice. After that, you’ll have 90 days to provide Form 5471. If you fail to file after that time, a $10,000 penalty will be charged for each 30-day period during which the failure to file continues. The additional penalty is limited to a maximum of $50,000.
Why do you need an expert to file Form 5471?
If you decide to handle your tax returns yourself, filing Form 5471 alone doesn’t guarantee you that there will be no penalty. The trick is to fill out Form 5471 correctly, so the IRS couldn’t consider the form “substantially complete" which also leads to penalties described in the previous section.
Is there anything you can do to protect yourself from Form 5471 penalties? Yes, you can contact our tax experts who will help you file Form 5471, the important but difficult one.