Form 5471 - Information Return of U.S. Persons with Respect to Certain Foreign Corporations
Who Must Use This Form?
Certain US persons who are shareholders, officers or directors of a foreign corporation (or international business company) may be required to file this form.
Form 5471 is similar in some respects to the information return for a partnership, an S corporation or a trust. Unlike a regular C corporation, the income of a foreign corporation may be either taxed to the shareholders or tax deferred until there is a distribution or a liquidation. If the foreign corporation has U.S. source income, that income will be subject to U.S. tax the same as a domestic corporation.
The term "foreign corporation" includes an "International Business Company" or IBC that is owned in part by US persons. It also includes a foreign limited liability company that does not make an election to be treated as a foreign partnership (multiple owners) or as a foreign disregarded entity (one owner).
The term "US Person" is used here to include a U.S. citizen or resident or a U.S. corporation, partnership, trust or estate.
The form is designed to serve multiple purposes and therefore is often very confusing and even intimidating to the novice. There are four categories of persons (including corporate shareholders) that may be required to file this form.
- A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
- A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
- A US person who had control of a foreign corporation for at least 30 days.
- A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.
What information is required?
The required information may be as minimal as the identification of the US shareholder and the name and address of the foreign corporation -- or as extensive as a comprehensive balance sheet and income statement converted from multiple foreign currencies into US dollars and also converted into a GAAP method of accounting.
If the corporation is controlled by five or fewer US shareholders (each of whom owns 10% or more of the foreign corporation), it will be deemed a controlled foreign corporation (CFC) and all or part of the corporation's income may be taxable to certain shareholders on a current basis.
When is it Due?
Form 5471 is due with the income tax return of the affected shareholder. For most corporations, that would March 15th or the extended due date. For most individuals, that would be April 15th or the extended due date.
Where Should it be Filed?
One copy of Form 5471 and required schedules should be filed with the taxpayer's tax return (Form 1040, 1120, 990 or 1065) and one copy should be filed with the International Division of the IRS in Philadelphia, PA.
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.
Why Comply ? (Penalties)
The penalties for failing to file this form 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. 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.
This form is not limited to the shareholders of a "controlled foreign corporation", even though the US shareholders of a CFC are the most likely to be required to file this form. Where a U.S. person owns 10% or more of the stock of a foreign corporation, they must file this form, even though the corporation is not controlled by five or fewer US Shareholders.
The percentage ownership tests can be very deceptive because of the attribution of ownership rules and constructive ownership rules. Essentially, shares of a foreign corporation owned by certain family members (except for nonresident alien family members) and shares owned by corporations or partnerships in which the US person is a partner or shareholder must be counted based on the person's ownership interest in the intermediate entity. While indirect ownership may raise the percentage of ownership for a direct shareholder, an indirect shareholder is not required to file the form.
This information is not intended to represent an authoritative and detailed discussion of the Form 5471 filing requirements, which are only available in the applicable U.S. tax code and IRS regulations. See https://www.irs.gov/forms-instructionsDownload PDF