Many American entrepreneurs who move overseas continue doing business by registering a company in their new home country. What many expats overlook, however, is that owning a foreign corporation also comes with 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 have ownership in a foreign corporation may have to file Form 5471 and report their shares, regardless of where they live.
This blog post covers everything you need to know about filing Form 5471, from which types of US expats must file the form to the deadlines that come 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 informative 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 any foreign assets in other countries. Form 5471 helps the IRS monitor the activity of US citizens who might be directors, officers, or shareholders in foreign corporations.
Who must file Form 5471?
Five types of American taxpayers have to file Form 5471:
- – US person that’s the owner of a Specified Foreign Corporation (SFC)
- – US person who is 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
- – Someone that becomes a US citizen or resident while owing 10% or more of a foreign corporation’s stock
- – A US person who had control of a foreign corporation for at least 30 days
- – A US person who owns 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
The term “US person” categories all US citizens, residents, partnerships, corporations, and estates or trusts into one group. It can include people who started the US tax year as nonresident aliens but became residents later in the year or married a US citizen.
You may have questions about what a “controlled foreign corporation” is, which is mentioned in the fourth type of taxpayers who need to file Form 5471. According to the IRS, a company falls under the category of 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 qualify for Form 5471, make sure to review Form 5471 instructions.
What are the main Form 5471 schedules?
As an overview of Form 5471, the main schedules that it includes are:
- – 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
To learn more about which schedule you have to file based on your category as a filer, check out the following table from the IRS here.
What’s the deadline for filing Form 5471?
For individual taxpayers, the deadline for filing Form 5471 is the same deadline for filing your 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 US shareholder identification details and your foreign corporation’s address. Other documents that will be necessary for Form 5471 include:
- – A detailed balance sheet for your foreign corporation’s year-end
- – Information about the corporation’s loans and operations
- – Your foreign income statement converted into USD
You’ll need to use the foreign exchange rates to convert the foreign income into dollars.
How do I file Form 5471?
You must file Form 5471 alongside your individual tax return.
Setting expectations – the IRS believes it should take you 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 may cause you to have to pay 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.
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,” continues the IRS.
Get Help from the Right Team of Tax Experts
We know this may seem like a lot of information to take in. 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. Our company has been named “Global US Expat Tax Provider of the Year” five times and has helped Americans in more than 200 countries with their taxes.