The individuals who fall within the four categories of U.S. persons who are required to file Form 5471 find out very fast just how incredibly complex this Form is. In addition to various problems associated with GAAP compliance, tax year adjustments, understanding very complex corporate tax and accounting rules (as well as the difference between them), and the logistical concerns with respect to obtaining the information, the sheer volume and variety of the information that Form 5471 requires the files to supply makes the Form one of the most difficult compliance requirements in the Internal Revenue Code.
In this essay, I intend to provide a very general overview of the information that needs to be disclosed on Form 5471.
1. General Information
Form 5471 generally requires you to disclose your personal information (such as Social Security Number, address, tax year, and so on), corporate information (name of the corporation, when organized, its business and so on), as well as on whose behalf Form 5471 is being filed.
Despite its apparent innocence, there are at least two pernicious issues in this seemingly basic section. First, there are detailed rules on whose behalf Form 5471 may be filed.
Second, the Form requires you to state your ownership share of the corporation at the end of the year. Sounds simple? Not so fast – there are specific attribution rules which may increase your share ownership in the corporation. Failure to apply those rules may result in choosing incorrect filing category and, ultimately, IRS penalties for non-compliance.
2. Category of Filers
There are generally four categories of filers who are required to file Form 5471 (there used to be five, but the first category was repealed by Congress).
From the outset, Form 5471 requires you to choose the category of filers that apply to you. This is not a simple process as each category has specific requirements. Moreover, you may (and most taxpayers actually do) fit into more than one category. If this is the case, then you may have to file additional schedules that require more disclosures to the IRS.
3. Stock of the Foreign Corporation
In this Schedule A of Form 5471, you are required to describe the stock of the corporation – number and class of stocks. Usually, this is one of the most benign sections of Form 5471. Nevertheless, some of my clients have had problems with Schedule A because they never properly documented all of the classes of stocks and their attributes. This resulted in substantial delays and proactive business planning.
4. U.S. Shareholders of the Foreign Corporation
In Schedule B, you will need to provide the name of each shareholder according to Form 5471 instructions. For each listed shareholder, you will need to provide the name, address, identifying number (for example, social security number), number of shares held (at the beginning and the end of the annual accounting period), and the class of shares. Moreover, for each shareholder, you will need to supply the pro rata share of Subpart F income (which, in itself, is a complex matter).
5. Schedule C: Income Statement
Schedule C is one of the most important and time-consuming parts of Form 5471. The complications are numerous.
First, the Income Statement should be prepared and reported on the Form in accordance with U.S. GAAP. If the foreign company used GAAP to prepare the original statements, the task is not very hard. If, however, the foreign company did not initially use GAAP, the conversion of financial statements to the GAAP standard can be incredibly complex, especially in a foreign context.
Second, the Income Statement should be reported in the Functional Currency and US dollars. The currency translation issues (especially according to GAAP) may become very difficult.
Third, the Net Income part of the Income Statement on Form 5471 presents its separate challenges with its separation of net income from current income per books according to the GAAP standard.
Finally, you need to make sure that the Income Statement corresponds to the Balance Sheet, especially given all of the currency translation issues.
Remember, various items on the income statement must be supported by attached schedules.
6. Schedule E: Taxes
The first common challenge in this section is to correctly identify the taxes that need to be reported. The second common issue is that you need to consult the instructions to make sure that the currency translation rate is correctly identified and presented on the form. I have seen even experienced international tax accountants make mistakes in this area.
7. Schedule F: Balance Sheet
Schedule F may be the most difficult part of Form 5471 (although schedules H and I are very close in this dubious contest).
The problems are so numerous that I will not even attempt to list them in this essay. Rather, I want to point out several common themes that you are likely to deal with in preparing Form 5471.
First, the Balance Sheet should be prepared according to GAAP and all amounts should be reported in U.S. dollars.
Do not be surprised if this means using as many as three or four different currency translation rates according to GAAP. The end result will be that your Balance Sheet does not appear to balance out, forcing you to engage in highly complex accounting.
Second, there will be a shortage of available space to properly reflect all of the Balance Sheet issues.
Third, Retained Earnings may become your best friend and your worst enemy. In the hands of a sophisticated tax professional (accountant or attorney), Retained Earnings may be used to resolve outstanding issues. A novice, however, may spend long hours trying to figure out how to use Retained Earnings and still fail in this task.
Finally, remember that certain items on the Balance Sheet must be supported by attached statements.
8. Schedule G Questions
There are various types of questions listed in Schedule G. In some situations, they may easily be answered, whereas other situations will require a more detailed analysis.
9. Schedule H: Current Earnings and Profits
You should be prepared to spend a significant amount of time on this section. This is another highly complex part of Form 5471. Earnings and Profits is an esoteric part of accounting which has a complex relationship with taxation. When it comes to Form 5471, the foreign context and GAAP rules greatly exacerbate the difficulty of the issues involved.
At the end of Schedule H, you will need to translate the amounts into US dollars and provide the translation rate.
10. Schedule I: Subpart F Income
Another challenging section of Form 5471. Treaties have been written on Subpart F income. I will just mention here that this is a highly complex section on which you should prepared to spend some time.
11. Schedule J: Accumulated Earnings and Profits
Although this part of Form 5471 maybe time-consuming, it is not very complex. One common difficulty that I have encountered in my practice is a practical one – lack of properly prepared records. If the foreign corporation has not been subject to 5471 requirements in the prior years or not for all years of its existence, it may not have the records to calculate the accumulated earnings and profits. This may result a “snowball” effect that it is more and more difficult to comply with Schedule J requirements unless one goes back many years to calculated the accumulated Earnings and Profits.
12. Schedule M
This form only applies in the context of a controlled foreign corporation (CFC). This is another time-consuming part of Form 5471 which concentrates on the transactions between the CFC and the shareholders and other related persons. It may take awhile before you figure out just what exactly should go on this form, especially if there are outstanding loans from and/or to shareholders.
13. Schedules O: Parts I and II
This part of Form 5471 allows the IRS to keep track of any corporate re-organizations, acquisition and disposition of the corporation’s stock, and other organization and asset related matters. Relatively speaking, this is not a complex part of the Form, but it has its own issues that may arise during its preparation.
Conclusion: Contact Sherayzen Law Office NOW for Help With Drafting Form 5471
Based on the very general overview of 5471 requirements, it becomes clear that you should not attempt to complete Form 5471 on your own. Nor should you expect any help from the IRS. There is not a single department that you can call to have your questions answered. 5471 specialists are limited to examiners to whom you will not have direct telephone access.
Therefore, if you fall within one of the categories of taxpayers who are required to file Form 5471, please contact Sherayzen Law Office. Our experienced international tax firm will help you prepare the necessary documentation, complete Form 5471 and file it on your behalf. If you have not filed your Forms 5471 for prior years, we will help you deal with this situation and guide you through the IRS voluntary disclosure process.