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Fundamental Form 5471 Concepts | Form 5471 Tax Lawyer & Attorney

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Form 5471 is the most important information return that the IRS uses to collect information about foreign corporations with substantial US ownership. US taxpayers must file a Form 5471 with their US tax returns; failure to do so may result in the imposition of significant IRS penalties. In order to identify whether the IRS requires them to file Form 5471, US taxpayers must at the very least understand the following three fundamental Form 5471 concepts: “US Person”, “US Shareholder” and “Controlled Foreign Corporation” (“CFC”). This article introduces readers to these fundamental Form 5471 concepts.

Fundamental Form 5471 Concepts: US Person

The definition of “US Person” is crucial to understanding your Form 5471 filing requirements. Generally, the definition of a US person includes the following categories of taxpayers: US citizens, US tax residents, a domestic partnership, a domestic corporation, certain trusts and certain estates. It should be pointed out that tax-exempt entities can also be US persons.

In order for a trust to be a US Person, it must not be a foreign trust; in other words, it must satisfy the legal tests set forth in the Internal Revenue Code (“IRC”) §7701(a)(30). The first test is that a court within the United States is able to exercise primary jurisdiction over the trust’s administrative issues. The second test is that a US person has authority to make all important discretionary decisions which cannot be vetoed by a non-US person.

In order for an estate to be a US person, it must not be a foreign estate as defined in the IRC §7701(a)(31).

Fundamental Form 5471 Concepts: US Shareholder

The concept of US shareholder is also very important for understanding one’s Form 5471 obligations. The definition of a US shareholder was recently modified by the 2017 Tax Cuts and Jobs Act (“TCJA”).

A “US shareholder” is a US Person who owns either: (a) 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation; or (b) 10% or more of the value of all the outstanding shares of a foreign corporation. The latter rule (10% ownership of the total value of shares) is applicable starting a tax year of a foreign corporation that begins after December 31, 2017.

It is important to point that “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

Fundamental Form 5471 Concepts: Controlled Foreign Corporation

Owners of shares in a CFC face a far greater Form 5471 compliance burden than owners of shares in foreign corporations which are not CFCs. Hence, the concept of CFC is extremely important to identifying your Form 5471 obligations.

A CFC is a foreign corporation with US shareholders that own on any day of its tax year, more than 50% of either (1) the total combined voting power of all classes of its voting stock, or (2) the total value of its stock. Again, the “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

The 2017 tax reform made profound changes to the definition of CFC. Many foreign corporations which were not CFCs under the pre-TCJA rules have been re-classified as CFCs starting tax year 2018.

Contact Sherayzen Law Office for Professional Help With Your Form 5471 Compliance

If you are a US person with an ownership interest in a foreign corporation of 10% or more, you may have extensive Form 5471 reporting obligations. Given the extreme complexity of the form and the high penalties associated with Form 5471 noncompliance, it is important secure the professional and experienced help of Sherayzen Law Office.

Contact Us Today to Schedule Your Confidential Consultation!

Incorrect or Delinquent Form 5471 Penalties

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Various Form 5471 penalties are associated with failure to file Form 5471 or the filing of an incorrect Form 5471. In this article, I will describe the most important of these penalties.

IRS Form 5471

The IRS Form 5471 is an extremely complex form that is used to satisfy the reporting requirements of two esoteric sections of the Internal Revenue Code: 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”).

As long as Form 5471 requirements are met, the Form must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations with their US tax returns.  Failure to file Form 5471 or failure to file a correct Form 5471, can result in steep penalties.

Form 5471 Penalties: Failure to file information required under section 26 U.S.C. § 6038(a) 

From the outset, it is important to note that 26 U.S.C. § 6038 applies to two different parts of Form 5471: the Form 5471 proper (i.e. the first four pages containing the identifying information and Schedules A through I) and Schedule M of Form 5471.   Failure to file either is enough to trigger a $10,000 penalty for each annual accounting period of each foreign corporation. If the IRS sends the taxpayer a notice of a failure to file, an additional $10,000 penalty (per foreign corporation) will be charged for each 30-day period (or fraction thereof), during which the failure continues after the 90-day period in which the notification occurred, has expired. This additional penalty is limited to a maximum of $50,000 for each failed filing.

Furthermore, there is an income tax penalty associated with the failure to comply with 26 U.S.C. § 6038 in a timely manner – the taxpayer may be subject to a 10% reduction of certain available Foreign Tax Credits. A further 5% reduction may be applied for each 3-month period (or fraction thereof), during which the failure to timely report or file continues after the 90-day period of IRS notification has expired. (26 U.S.C. § 6038(c)(2) places certain limitations on this penalty).

The Second Set of Form 5471 Penalties: Failure to file information required by 26 U.S.C. § 6046 and related regulations (Form 5471 and Schedule O)

In addition to 26 U.S.C. § 6038 Form 5471 penalties, there is also an additional set of Form 5471 penalties associated with 26 U.S.C. § 6046 (Form 5471 and Schedule O).  Failure to comply with 26 U.S.C. § 6046 will subject the taxpayer to another $10,000 penalty for each failure for each reportable transaction. Additionally, if the failure to report or file continues for more than 90 days after the date the IRS mails notice of this failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. This additional penalty is limited to a maximum of $50,000.

Form 5471 Non-Compliance May Result in Criminal Penalties

In addition to civil penalties under 26 U.S.C. § 6038 and 26 U.S.C. § 6046, criminal penalties may apply to Form 5471 filers in certain circumstances. In particular, a willful failure to file an accurate Form 5471 may activate the  broad provisions of 26 U.S.C. § 7203 (“Willful failure to file return, supply information, or pay tax”), 26 U.S.C. § 7206 (“Fraud and false statements”), and 26 U.S.C. § 7207 (“Fraudulent returns, statements, or other documents”).

Form 5471 Penalties and Persons Other Than the Filer

In situations where the filer should have filed Forms 5471 for other persons, but failed to do so, Form 5471 penalties may be extended to these other persons.

Contact Sherayzen Law Office For Help With Form 5471 Penalties and Compliance

If you partially or fully own a foreign corporation, you may be subject to the Form 5471 requirements.  As explained in this article, failure to timely and/or correctly comply with Forms 5471 may result in steep Form 5471 penalties.

This is why you should contact the experienced Form 5471 tax professionals of Sherayzen Law Office.  We can help you  prepare and file your Form 5471 as part of your annual compliance as well as help deal with the Form 5471 voluntary disclosure. So, Call Us Now to Schedule Your Confidential Consultation!