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US GAAP Conversion of Foreign Financials: Most Common Issues | Form 5471 Lawyer

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Form 5471 generally requires US GAAP (Generally Accepted Accounting Practices) conversion of foreign financial statements for the purposes of reporting book income, because foreign accountants usually prepare these statements based on a different foreign standard.  While Treas. Reg. Reg. §1.964-1(a)(2) contains a limited exception to the US GAAP conversion adjustments for “non-material” items (the same exception applies to tested/income loss calculation for GILTI purposes; see Treas. Reg. §1.951A-2(c)(2) (which refers to Treas. Reg. §1.952-2, which, in turn, mention the “materiality” rules of the §964 regulation)), the translation of foreign financial statements to US GAAP is a common problem for tax professionals who deal with Form 5471.

In this article, I will outline the most common issues related to the conversion of foreign financial statements to US GAAP.

US GAAP Conversion Issues: Depreciation

At the top of the US GAAP adjustments are different methods of depreciation and amortization. These differences cover pretty much all types of depreciable assets: fixed assets and intangible assets (including goodwill).

When we at Sherayzen Law Office prepare Forms 5471 for our clients, it is our standard practice to request that foreign accountants provide a detailed depreciation report, including amounts and dates concerning the purchase/sale of assets, the amortization/depreciation conventions used in foreign financial statements and the methods of accounting for increase/decrease in the value of depreciable assets.

US GAAP Conversion Issues: Inventory

Another very common area of US GAAP adjustments involves inventory. Here there could be an array of variations from FIFO/LIFO to expense capitalization methods and valuation of inventory.  Common problems arise when the inventory valuation adjustments result from related-party transactions.

For example, in one of our cases, our client had contracts of sale drafted between the head office in the United States and a foreign branch office (due to the foreign country’s requirements), making it impossible to directly rely on the foreign branch’s financial statements to determine the Cost of Goods Sold (COGS) due to varying mark-ups on tens of thousands of items.

US GAAP Conversion Issues: Valuation of Assets

One highly-problematic area for US GAAP adjustments is the valuation of assets in the foreign financial statements.  Oftentimes and in a large number of tax jurisdictions, historic cost of assets is replaced with another valuation method allowed by a local accounting standard but not by US GAAP.

We see this problem appear often in tax jurisdictions as varied as Czech Republic, Jamaica, Nigeria, Pakistan, Poland, et cetera.

US GAAP Conversion Issues: Mergers, Dissolutions and Acquisitions

Mergers, dissolutions and acquisitions may result in a bewildering array of differences between foreign financial statements and US GAAP requirements: from income recognition to asset valuation, treatment of reserve, E&P calculations and so on. Sometimes, there may be a break in the continuity of financial statements due to a dissolution of one entity and creation of another entity for US GAAP purposes while entities are treated as one entity in a foreign jurisdiction. I remember one case from Pakistan and one case from Poland where we had to make just an enormous amount of changes to bring these financial statements into compliance with US GAAP precisely due to the issues of mergers and acquisitions.

US GAAP Conversion Issues: Hyperinflation

Hyperinflation may present a US international tax attorney with its own challenges. As it is especially common in Latin America, local financials would incorporate inflationary adjustments that are incompatible with US GAAP.  An international tax lawyer has to identify these adjustments, reverse them and, if necessary, replace with adjustments required by GAAP.

US GAAP Conversion Issues: Reserves

Finally, the last most common area of problems has to do with reserves.  The problem usually arises in situations where local accounting rules permit allocation of certain reserves in a manner incompatible with US GAAP rules.

US GAAP Conversion Issues: Special Case of Consolidated Financial Statements

In a situation where a US parent company of a foreign subsidiary prepares consolidated financial statements, problems may arise with respect to whether these statements provide all relevant information needed to create a GAAP-compliant Form 5471. There are four main areas of concern in this type of cases: artificial consolidations through check-the-box rules, foreign currency fluctuations, deductions related to pensions and transfers within the group.  I will discuss these issues in more detail in a future article.

E&P Adjustments

I want to mention here that, in addition to GAAP adjustments to local financial statements, Form 5471 also requires E&P adjustments to GAAP-compliant financial statements. I will explore this topic in a future article.

Contact Sherayzen Law Office For Professional Help with Form 5471 Preparation and Offshore Voluntary Disclosures

If you are a US person who owns (fully or partially) a foreign corporation and you need to prepare a Form 5471 for a current year or any previous years, then you should contact Sherayzen Law Office for professional help.

Our international tax team, led by an international tax attorney and founder of Sherayzen Law office, Mr. Eugene Sherayzen, is a group of highly experienced and creative tax professionals with profound knowledge of US international tax law and US international tax accounting rules. We have filed hundreds of Forms 5471 in the past helping clients around the globe with their current US tax compliance as well as offshore voluntary disclosures related to prior Form 5471 noncompliance. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

2024 Form 5471 Penalties | International Tax Lawyer & Attorney

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Failure to timely and correctly submit Form 5471 with a US tax return may lead to an imposition of Form 5471 penalties. In this article, I will discus the most important 2024 Form 5471 penalties that US taxpayers may face if they fail to comply with the Form 5471 requirements.

2024 Form 5471 Penalties: Purpose of Form 5471

We first need to understand the purpose of Form 5471 and broadly identify who may need to file this form. The IRS Form 5471 is an extremely complex form that is used to satisfy the reporting requirements of mainly 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”).

It should be noted that Form 5471 is used to satisfy other US tax provisions, especially after the 2017 tax reform. IRS §§ 6038 and 6046, however, are most relevant for our discussion of Form 5471 penalties.

Certain US citizens and US tax residents who are officers, directors or US shareholders of a foreign corporation may need to file Form 5471 and accurately comply with its reporting requirements. Failure to file Form 5471 or failure to file a correct Form 5471 may result in the imposition of steep IRS penalties.

The First Set of 2024 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 six pages containing the identifying information and Schedules A through I plus Schedules H and I-1) 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 2024 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 to file 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.

2024 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”).

2024 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 2024 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 your Form 5471 filing obligations may result in steep Form 5471 penalties.

Contact Sherayzen Law Office today for professional help concerning Form 5471 penalties, including engaging in offshore voluntary disclosures involving Form 5471.

Contact Us Now to Schedule Your Confidential Consultation!

2022 Form 5471 Penalties | International Tax Lawyer & Attorney

/in , /by

Failure to timely and correctly submit Form 5471 with a US tax return may lead to an imposition of Form 5471 penalties. In this article, I will discus the most important 2022 Form 5471 penalties that US taxpayers may face if they fail to comply with the Form 5471 requirements.

2022 Form 5471 Penalties: Purpose of Form 5471

We first need to understand the purpose of Form 5471 and broadly identify who may need to file this form. The IRS Form 5471 is an extremely complex form that is used to satisfy the reporting requirements of mainly 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”).

It should be noted that Form 5471 is used to satisfy other US tax provisions, especially after the 2017 tax reform. IRS §§ 6038 and 6046, however, are most relevant for our discussion of Form 5471 penalties.

Certain US citizens and US tax residents who are officers, directors or US shareholders of a foreign corporation may need to file Form 5471 and accurately comply with its reporting requirements. Failure to file Form 5471 or failure to file a correct Form 5471 may result in the imposition of steep IRS penalties.

The First Set of 2022 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 six pages containing the identifying information and Schedules A through I plus Schedules H and I-1) 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 2022 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.

2022 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”).

2022 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 NOW For Help With 2022 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 your Form 5471 filing obligations may result in steep Form 5471 penalties.

Contact Sherayzen Law Office today. 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 concerning your past Form 5471 noncompliance.

Contact Us Now to Schedule Your Confidential Consultation!