Form 5471, officially titled Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is an informational return that some U.S. citizens, U.S. Permanent residents, and people meeting the Substantial Presence Test must file to disclose their relationship with foreign corporations. Form 5471 provides the IRS with certain information about foreign corporations, including their ownership, income, assets, liabilities, and transactions with related parties. Form 5471 is not an income tax return, but rather an informational return that must be filed with an individual’s tax return.
Not every U.S. taxpayer who owns stock in a foreign corporation must file Form 5471. U.S. taxpayers need to file Form 5471 depending on the taxpayer’s ownership percentage, whether the taxpayer is an officer of the corporation, and whether the corporation is a controlled foreign corporation. The IRS divides taxpayers who must file Form 5471 into five categories.
Category 1: U.S. Shareholders of Specified Foreign Corporations
The first category applies to U.S. shareholders of specified foreign corporations. A specified foreign corporation is a controlled foreign corporation where a U.S. corporation owns 10% or more of the value of the stock. This category largely applies to the transition tax enacted in 2017 and would only apply to a current taxpayer in limited circumstances.
Category 2: Officers and Directors of Foreign Corporations
The second category covers U.S. citizens or residents who serve as officers or directors of a foreign corporation. If a U.S. person acquires a 10% interest in a foreign corporation, the officers and directors of that foreign corporation that are U.S. citizens or residents may have reporting obligations. The U.S. person who acquired the 10% or more interest need not be the same person as the director or officer.
Category 3: Certain Shareholders Who Acquire or Dispose of Foreign Corporation Stock
The third category applies to U.S. persons who acquire stock meeting the 10% ownership threshold, dispose of enough stock to fall below the 10% threshold, or who become a U.S. person while meeting the 10% threshold. For example, if an American citizen purchases a 15% share in a French corporation, the American citizen would be a Category 3 filer. If an American citizen owned 15% of a French corporation and then sold half of his stock, he would fall below the 10% threshold and would be a Category 3 filer. If a French citizen owned 15% of a French corporation and then spent enough time in the United States to meet the substantial presence test, he would become a U.S. person and would be a category 3 filer.
Category 4: U.S. Persons Who Control Foreign Corporations
The fourth category applies to U.S. persons who control a foreign corporation for an uninterrupted period of 30 days during the corporation’s accounting year. Control means owning more than 50% of the corporation’s value or voting power. To determine control various ownership attribution rules are applied so that ownership of a family member would be attributed to the taxpayer. So, if a taxpayer and his 3 brothers each own 25% of a foreign corporation, each brother’s ownership will be attributed to the taxpayer, so the taxpayer will be deemed to have control of the foreign corporation even though he only owns 25%. Since the taxpayer is deemed to control the foreign corporation, he would be a category 4 filer.
Category 5: U.S. Shareholders of Controlled Foreign Corporations
The fifth category applies to U.S. shareholders of controlled foreign corporations (CFCs). A CFC is a foreign corporation in which U.S. shareholders own more than 50% of the voting power or stock value. For CFC purposes, a U.S. shareholder means a U.S. person who owns at least 10% of the foreign corporation’s voting power or value.
For example, if a U.S. citizen and a U.S. resident alien each own 50% of a foreign corporation, the corporation will be a CFC. Both shareholders will be required to file Form 5471. It is important to note that Form 5471 needs to be filed even if the foreign corporation had no income.
What information is included in Form 5471?
Form 5471 requires more than identifying a taxpayer’s ownership percentage in each foreign corporation. The information can include the taxpayer’s and corporation’s name and address, the foreign corporation’s stock classes, the foreign corporation’s income statement and balance sheet, as well as the amount of Subpart F and NTCI income. There are a total of 18 possible schedules to be filed with Form 5471, with the category of filer determining which schedules are required.
What Should You Do if You Failed to File Form 5471?
Form 5471 is due with the taxpayer’s 1040. If a taxpayer fails to file Form 5471 in a timely manner, the penalties can be severe. The IRS can assess penalties totaling $60,000 for each Form 5471 that was not filed. Given the complexities surrounding foreign corporations, it is important to review your reporting obligations with a tax professional annually.
At Safeguard Law, PLLC, our team of experienced tax attorneys specializes in helping our clients navigate issues such as this. Contact us today to schedule a consultation! Our main business line is (202) 505-1741.