Own a company or are you a shareholder in a foreign company? Well, being a US citizen, it is the duty of every shareholder, director, and officers of certain foreign corporations to complete a Form 5471 filing and submit it to the IRS. Not sure what it is all about?
This article will help you understand all about form 5471 and how to file it.
IRS Form 5471
Form 5471 is an information return and a filing requirement that is applicable to US residents and citizens who are shareholders, directors, or officers in particular foreign corporations. They need to use this form to report the activities of the foreign corporation to the government. Even though it is only an information return, it has to be completed properly. This is because it is a crucial tool for audit selection and in determining if the company is subject to Subpart F or GILTI by the IRS.
In short, if a person owns more than 50% of a foreign corporation, they have to plan for the new GILTI (Global Intangible Low-Taxed Income) tax. During December 2017, the Tax Cuts and Jobs Act (TCJA) made changes to the tax law, including the form 5471 instructions, which has changed how controlled foreign corporations (CFCs) would operate abroad.
What is IRS form 5471?
The IRS form 5471 is an information return (not a tax return) that US residents or US citizens who are directors, officers, or shareholders in certain foreign corporations have to file. It records information about the person’s shareholdings in the foreign corporation. It also reports the person’s foreign assets, earnings, and other transactions that are taking place out of the USA.
Based on the kind of foreign transactions, form 5471 filers also have to file other related tax forms. Form 5471 has 4 pages, and 7 different schedules (A, B, C, D, E, F, G, I, E-1), and 7 separate schedules (E-1, H, I-1, J, M, O, P). Based on the category you fall under, you will have to work on the form 5471 filing.
Do I need to file tax form 5471?
Determining who has to work on the form 5471 filing is normally a challenge. The filing requirements relate to people who have a certain level of control in certain foreign corporations. So, filing of the form is important for those US people who:
- Are a director, shareholder, or officer of a foreign corporation
- Obtains ownership interest in a foreign company that is more than the prescribed limits
- Disposes of shares of a foreign corporation that reduces the person’s ownership interest to less than the prescribed limits
- Controls the foreign corporation for an uninterrupted period of at least 30 days in a year
- Is a 10% or more shareholder in the foreign corporation that is a “controlled foreign corporation” for an uninterrupted period of at least 30 days in a year. And that person owns that stock on the last day of the year.
Determining Form 5471 Category Filers
To determine the ownership interest of a person in the company, complex rules come into play. Form 5471 category and filers get complicated as well. The determination of the category is based on different factors, including the control, changes in ownership, and ownership amounts (direct, indirect, and constructive).
Talking about form 5471 category for the filers, there are five of them, being:
- Category 1: For US shareholders of a foreign corporation that is an SFC at any point during the year and also owned stock in the company on the last day of the year.
- Category 2: A US individual (does not necessarily need to be a director or officer) of a foreign corporation receiving 10% of stock (in vote or value) or an additional 10% ownership (in vote or value) in any given tax year.
- Category 3: A US person who obtains more than 10% stock in a foreign corporation or gets an additional 10% stock more than what they own in a tax year, a person who becomes a US person during the year while owning a 10% stock in the company, or a person who disposes of stock to reduce their ownership to less than 10% during a tax year.
- Category 4: This for the US person who had control over the foreign corporation during the tax year (ie. more than 50% ownership)
- Category 5: This is for US shareholders who own stock in a foreign corporation that is a CFC at any time during the tax year. And they own the stock on the last day of the tax year.
Determining the category of filer using Tax Form 5471 Online Tool
As mentioned above as well, determining the correct category is complicated, and you will need some help. That is where we have introduced an online form 5471 tool that would help you in determining if you need to file this information tax form or not. It would also help in telling you which category you belong to. Check out the online tool here!
Just to be clear, you need to ensure that the category you choose is right as there are penalties associated with it. The minimum penalty usually is $10,000 for one entity per year. And the statute of limitations stays open indefinitely on the entire tax return.
Filing Tip: Keep all your share ownership information of your foreign company in an online cap table. You can easily share the details with your tax accountant and save you a lot of time and hassle.
Filing of form 5471
Filing form 5471 is a bit complicated and it takes days and even weeks to complete this form. But it is important to fill the form and it should be done properly if you want to avoid the penalties that might come with it. The form would need to be filled in with information about the US shareholder and the foreign corporation.
How to file form 5471?
While you are working on your individual income tax return, you will have to work on the form 5471 filing. It would go as an attachment with your return. Or, if applicable, it would be attached with the corporation, domestic partnership, or exempt organization return. The form is about 4 pages long and has several schedules in it. The complete form, after being filled, would be about 6 to 7 pages.
Other than yours and the company’s details, the form needs to include the data on transactions that have taken place in the company between you and the corporation, the original capital contribution made by you into the company and any other data. The form would also include the balance sheet of the corporation along with the income and expense sheet for the current year of operation.
All this has to be obtained from the company and added to the form. It is important to follow all the rules and ensure that the form is filled properly including selecting the right category and adding all the schedules. Also, ensure that the tax return is filed on time by the due date.
Are there any penalties if I fail to file form 5471?
Other than the penalties that come with an incomplete form 5471 filing, if you do not file form 5471 at all, there are other penalties as well. This form is an attachment to the individual income tax return, and it has to be filed by the due date for the return. And if you fail to file form 5471, you would have to pay at least $10,000 each year. An additional penalty of up to $50,000 can also be applied if it is still not filed. Moreover, criminal penalties can also be applied for the failure to file the form. So, it is better to always be on time rather than to pay such a massive penalty.
Need any assistance in filing form 5471?
Now that you are clear about what form 5471 is all about, ensure that you file it on time so that you avoid any penalties that might come your way. And if you need some help with the form 5471 filing or to find the category you belong to, contact our experts. If you need any assistance in incorporating your business in the US contact IncParadise.