Foreign Corporation Taxes (Form 5471)

 

Who is required to file Form 5471?

A US citizen or resident who has a 10% or more interest in, or is a director or officer in certain foreign corporations is required to file Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

What does the Form 5471 report?

Form 5471 reports activity and financial assets in the foreign corporation. Examples of the information that is required to be reported includes balance sheet details, income statement information, personal details regarding shareholders, business operations, payments to officers, directors, and shareholders, loans and dividends. All transactions between the filer and the corporation must be reported.

How is the Form 5471 filed?

The form is filed along with your individual income tax return. For businesses that own 10% or more interest in foreign corporations, the Form 5471 is filed along with the related business corporate tax return.

What is a CFC?

CFC stands for Controlled Foreign Corporation. When more than 50% of a foreign corporation is owned by US citizens or residents collectively, the term CFC is applied. When this is the case, certain types of income from the corporation, referred to as Subpart F income, may flow through onto the individual income tax returns of the shareholder and become taxable income, regardless of whether this income was actually distributed to shareholders. Subpart F incomeincludes, among others, loans taken out by the shareholder from the corporation, interest,dividends, insurance income, rental income, personal service income, and income from offshoreshipping. Not included in Subpart F income is income from factories and retail stores that do not operate at all in the US and do not do business with US associates. Such income would not be taxed to the US shareholders until it is actually distributed to them.

What kind of penalties exists for failure to file Form 5471?

An individual who fails to file Form 5471 is faced with a $10,000 penalty per year for each foreign corporation for which he/she failed to file. There is an additional penalty of $10,000 perthirty day period for failure to file after receipt of an IRS notification. This penalty can build up to $50,000. Furthermore, there is no statute of limitations limiting the IRS’s ability to penalize the taxpayer to any amount of time. This means that if the IRS becomes aware that an individual failed to file for many years – he can be penalized for each of those years, separately for each corporation in which he held 10% or more interest.

How likely is it that the IRS will find out about my interest in a foreign corporation?

With the IRS’s recent FATCA agreements with many foreign countries and related party reporting by foreign financial institutions, the IRS is more likely that ever to obtain information about the shareholders of foreign corporations.