Filing Form 5471 – Foreign Corporations Reporting for US Expats
Donald Dewees is an American citizen who has been living in Canada since 1971. He is employed, and he also does some consultancy work, and he is paid for his consultancy work from a corporation he set up (on advice from a Canadian accountant) to improve his tax-efficiency.
Because he wasn’t drawing income from the corporation (to defer paying personal income tax on it), there was no US tax liability related to the corporation.
Mr Dewees has nonetheless found himself in deep water with the IRS because he wasn’t reporting the corporation to the IRS on form 5471 when he filed his annual US tax return, despite their being no US tax due.
In fact, due to a US-Canadian treaty, the Canadian Revenue Department have withheld what the IRS think he owes in penalties for not filing form 5471 from Mr Dewees’ Canadian tax refunds, giving his money to the IRS instead.
There’s a general lesson in Mr Dewees’ story for US expats, that not owing any US tax doesn’t protect you from potentially large penalties if you don’t file, and there’s also a more specific lesson for American expats with foreign corporations that they shouldn’t neglect to file form 5471.
Form 5471 reporting requirements for Americans with foreign corporations
The US is the only major nation that requires its citizens to file taxes when they live abroad, and it is certainly the only nation that has access to their foreign banking and tax information as well as having treaties that let it enforce its tax regime globally.
Many US expats, entrepreneurs and Digital Nomads have, similar to Mr Dewees, set up a foreign corporation to reduce (or defer) the US tax they must pay. The majority of these expat owners of foreign corporations should be filing form 5471 with their US tax return. Specifically…
“A foreign corporation that is actually doing business that is considered a corporation under US tax principles does not create US tax liability for a US person unless it actually makes a distribution.”
Any US person who is an officer or director of a foreign corporation that is at least 10% owned by a US person at any time during the year.
– Any US person who owns at least 10% of a foreign corporation that is overall more than 50% owned by US persons
– Any US person who is an officer or director of a foreign corporation that any US person owns 10% or more of, or if there is any increase or decrease of stock ownership of at least 10% in a year
– Any US person who controls more than 50% of a foreign corporation for at least 30 days in a year
– Any US person who marries a foreigner who owns at least 50% of a foreign corporation is required to file form 5471.
Form 5471 is a complex form; its notes say it takes over 30 hours to file. Furthermore, penalties start at $10,000 a year for not filing it or for incorrect or incomplete filing. As such we strongly recommend that expats with foreign corporations contact an expat tax specialist if they have any doubts regarding filing form 5471.
Expats who are behind with their US tax filing should can catch up using the Streamlined Procedure IRS amnesty program. The program requires that expats file their last 3 federal returns, their last 6 FBARs (if appropriate), and self-certify that their previous non-compliance was non-willful. So long as they do so before the IRS contacts them, expats won’t face any penalties, and furthermore if they claim one or more of the available exemptions (such as the Foreign Tax Credit and the Foreign Earned Income Exclusion) when they file, most expats don’t wind up owing any US taxes at all.
Tax reform changes
The recent tax reform law has changed the playing field for expats with foreign corporations by treating corporate income as though it were the personal income of the corporation’s owners. As such, expats with foreign corporations who haven’t been filing form 5471 need to catch up with their filing to avoid penalties at the earliest opportunity, and we also recommend that they consult with an expat tax expert to understand how the new tax rules affect them and ensure that their corporate structure continues to be as tax-efficient as possible going forward.