August 5


Foreign Owned Corporations, Form 5471 and The IRS

By Jason Kovan

August 5, 2020

  • Foreign Owned Corporations, Form 5471 and The Streamlined Filing Compliance Procedures

    If you are a U.S. expat or U.S. taxpayer keep reading. Individuals and businesses need to know about the requirements for filing about IRS Form 5471, which is commonly referred to by the IRS as “The Information Return of U.S. Persons with Respect to Certain Foreign Corporations.”

    The IRS breaks down several classifications you might fall into that would require you to file Form 5471. The IRS explains that by their definition, that a “U.S. person” includes U.S. citizens, U.S. taxpayers, partnerships, trusts, estates, and corporations and lists several categories under which you are required to file. Here are some of the main groupings:

    Category 1 filer: A U.S. tax payor who is an officer or director of an overseas corporation in which any U.S. person owns or acquires 10% or more of the stock of the foreign corporation, 10% or more in value or voting power of outstanding stock in a foreign corporation,

    Category 2 filer: A person who becomes a U.S. taxpayer while owning 10% or more of the stock of the foreign corporation,

    Category 3 filer: A U.S. person who had control of a foreign corporation for at least 30 days while meeting the 10% threshold requirement or reduces his holding under 10% ownership, or

    Category 4 filer: A U.S. shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.

Additional Schedule, which may affect or require reporting of Form 5471 include:

  • Schedule E (Form 5471), Income, War Profits, and Excess Profits Taxes Paid or Accrued
  • Schedule H (Form 5471), Current Earnings and Profits 
  • Schedule I-1 (Form 5471), Information for Global Intangible Low-Taxed Income
  • Schedule J (Form 5471), Accumulated Earnings & Profits (E&P) of Controlled Foreign Corporation
  • Schedule M (Form 5471), Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons
  • Schedule O (Form 5471), Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock
  • Schedule P (Form 5471), Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations
  • Persons, shareholders, and corporations that fail to file or who incorrectly file Form 5471, can face some rather stiff penalties by the IRS. These include a $10,000 penalty for each annual accounting period of each foreign corporations’ failure to provide this information and an additional $10,000 if Form 5471 is not filed prior to the issuance of a 90-day cure notice from the IRS.

There are also penalties against the amount the U.S. government allows as a credit against foreign taxes and criminal charges could follow. If you want to dig deeper here’s where you can find the details from the IRS website, read more

How does the IRS classify and recognize a foreign corporation?

The IRS definition of a foreign corporation includes a domestic foreign partnerships or corporations, an estate or trust, any type of company classification requiring permitting including a sole practitioner, and more.

What about my tax liability?

The calculations for dividends, shareholders distributions, unpaid earnings and direct remunerations flows through to your individual tax return and possibly your corporate returns if those shares are owned by a U.S. company you have an interest in.

What options do you have that allow you to satisfy this delinquency and avoid the consequences of tax penalties?

If after consulting with an expat tax attorney (attorney-client privilege) who is experienced with Form 5471, and has dealt with the IRS to resolve this kind of disclosure issue, you realize that you have exposure there are a few remedies you can look into including the Streamlined Filing Compliance Procedures. The IRS may still impose some or all the penalties allowed by the tax code. It depends if the IRS determines that Form 5471 was willfully withheld. That is why you need to speak to a tax attorney first before consulting with a CPA.

The IRS has been working diligently to track down U.S. persons who fail to file U.S. tax returns including Form 5471. Penalties can be imposed for each year that this form is not filed, and criminal charges could be filed.

The IRS has been signing agreements with foreign countries to exchange information exposing foreign non-disclosed activities, looking for U.S. taxpayers and corporations who are non-compliant.

Need a tax partner to speak with?

If you think that you need advice, contact our offices, and speak with our managing partner, Jason Kovan JD, CPA. Jason is our leading expat tax expert. Prior to establishing Tax Law Expats and Expat Tax Partners LLC., Jason served as Executive Tax Director at KPMG working with clients, individuals, and corporations throughout the world. To learn more about TaxLawExpats visit our HOME page here.

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