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What expats often overlook when they register their business in another country is that owning a foreign corporation implies various tax obligations they may have never even heard of.
Since the US has a citizenship-based taxation system, American expats must declare their worldwide income and business interests to the IRS every year. Americans who own shares in a foreign corporation may also have to file Form 5471 to report these shares, regardless of where they live.
Below, you’ll learn everything you need to know about filing Form 5471, from who must file the form, to the deadlines and possible penalties that you risk if you don’t comply.
What is Form 5471?
Form 5471, which the IRS calls “Information Return of US Persons With Respect To Certain Foreign Corporations”, is an informational return that US taxpayers with shares in a foreign corporation must file. Whether you need to file Form 5471 depends on the percentage of stock you own in a foreign corporation.
The IRS is very strict about preventing American taxpayers from hiding foreign assets in other countries. So, this form helps the IRS monitor the activity of US citizens who might be directors, officers, or shareholders in foreign corporations.
Page 1 of Form 5471: Click here to download (Source: IRS)
Who must file Form 5471?
A US person has to file Form 5471 in the following five situations:
- As the owner of a Specified Foreign Corporation (SFC) (Category 1)
- As an officer or director of a foreign corporation in which a US person owns more than 10% or more of the foreign corporation’s stock (Category 2)
- When becoming a US citizen or tax resident while owing 10% or more of a foreign corporation’s stock (Category 3)
- If they had control of a foreign corporation for at least 30 days (Category 4)
- If they own the stock of a foreign corporation that is a controlled foreign corporation for an uninterrupted period of a minimum of 30 days and who owned that stock on the last day of the tax year (Category 5)
The term “US person” categorizes all US citizens, residents, partnerships, corporations, and estates or trusts into one group. It also includes people who started the US tax year as nonresident aliens but became residents later in the year or married a US citizen.
Note:
If you’re unsure which filing category is yours, we suggest hiring a US expat tax preparer. These professionals are experienced in handling US taxes for citizens living outside the country and can solve your doubts in minutes. Plus, they can share valuable tax optimization strategies to help you reduce your US tax bill.
You may have questions about what a “controlled foreign corporation” is, which relates to the fourth category of taxpayers who must file Form 5471. According to the IRS, a company is considered a controlled foreign corporation if:
More than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or more than 50 percent of the value of all its outstanding stock, is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the foreign corporation’s tax year.
To learn about whether you are required to file Form 5471, make sure to review these detailed Form 5471 instructions provided by the IRS.
What are the main Form 5471 schedules?
Form 5471 is quite complex and consists of several supplementary schedules:
- Form 5471 Schedule A – Stock of the Foreign Corporation
- Form 5471 Schedule B – US Shareholders of Foreign Corporations
- Form 5471 Schedule C – Income Statement
- Form 5471 Schedule E – Income, War Profits, and Excess Profits: Taxes Paid or Accrued
- Form 5471 Schedule F – Balance Sheet
- Form 5471 Schedule G – Other Information
- Form 5471 Schedule H – Current Earnings and Profits
- Form 5471 Schedule I – Summary of Shareholder’s Income from Foreign Corporation
- Form 5471 Schedule J – Accumulated Earnings and Profits of Controlled Foreign Corporations
- Form 5471 Schedule M – Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons
- Form 5471 Schedule O – Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock
- Form 5471 Schedule Q – Report of Controlled Foreign Corporation income by CFC income groups
- Form 5471 Schedule R – Distributions From a Foreign Corporation
The schedules you must attach depend on your filing category. You can see requirements by category in this table created by the IRS.
What’s the deadline for filing Form 5471?
For individual taxpayers, the deadline for filing Form 5471 is the same as the deadline for filing their tax return: April 15 for those in the US and June 15th for those who reside abroad. For corporations, the deadline is March 15th.
What information do I need?
To file Form 5471, you’ll need to provide your own personal details (name, address, ITIN, etc) as well as the foreign corporation’s details.
Other documents that will be necessary for Form 5471 include:
- A detailed balance sheet for your foreign corporation’s year-end, in the operational currency, as well as USD
- Information about the corporation’s transactions with US shareholders
- Your foreign profit and loss statement in the operational currency, as well as USD
You’ll need to use IRS-defined foreign exchange rates to convert the foreign income into dollars.
How do I file Form 5471?
You must file Form 5471 with your tax return. For individual US taxpayers, it is attached to Form 1040 and filed as part of the annual tax return.
Setting expectations:
The IRS estimates it should take around 38 hours to complete Form 5471. Yes, 38 hours! However, if this is your first time filing Form 5471, and you’re still not used to the complexity of the US tax system, it could take much longer.
What are the fines and penalties for not filing Form 5471?
Non-compliance with Form 5471 filing requirements may cause a $10,000 fine for each accounting period of your foreign corporation. If you don’t file within 90 days after getting a notice from the IRS, the IRS will include an additional $10,000 in fines for each 30-day period.
Form 5471 penalties are not automatically applied, meaning they are not issued by an IRS computer to every taxpayer who has missed the requirement. The foreign nature of the disclosure makes lack of compliance less detectable than other types of income reporting or filing requirements.
The fines for not filing Form 5471 can also extend to the amount you can claim in Foreign Tax Credits. “Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit,” says the IRS in their Form 5471 instructions.
If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired.
Get help from the right team of tax experts
We know Form 5471 filing requirements involve a lot of information and complexity. After all, the US sure doesn’t have the world’s most understandable and straightforward tax system.
If you still have questions about filing Form 5471, Bright!Tax is here to help.
Contact us today and one of our CPAs will follow up within a couple of hours to assess your tax situation.
We aim to help you efficiently stay compliant with your tax obligations, with as little stress as possible.
