A Form 5471 Beginner’s Guide to Foreign Corporations

A Beginner’s Guide to Form 5471 Foreign Corporations

With the globalization of the U.S. economy, it is becoming increasingly common for U.S. Taxpayers to have an ownership interest in a foreign corporation — which may then require the Taxpayer to file Form 5471 to report their ownership to the IRS (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). Form 5471 is more complicated than some of the other IRS international tax reporting forms such as the FBAR or Form 8938, because it requires significantly more information from the Taxpayer — and includes many different Schedules the Taxpayer must file depending on which category(s) of filer they qualify as. When coupled with the requirements involving GILTI (Global Intangible Low-Taxed Income) and Subpart F, Form 5471 can get very complex for many taxpayers to complete — presuming they can even obtain the necessary information required to complete the form.  Let’s review some key basics of reporting Form 5471. 

*Golding & Golding previously published the 5 Key Facts that Form 5471 Filers Should Know For Reporting article back in 2021 and has since updated and expanded the summary.

Who has to Report Ownership in a Foreign Corporation?

When a U.S. person has an ownership or interest in a foreign corporation, they may be required to file Form 5471. Unlike the FBAR or Form 8938, Form 5471 requires the Taxpayer to provide detailed information about a corporation’s income, expenses, and balance sheets. This can be very daunting, especially for taxpayers without any background in accounting, especially if the corporate documents are in a foreign language. In addition, the Taxpayer may need to calculate GILTI and Subpart F income as well.

Does the Entity Qualify as a Dormant Corporation?

The Internal Revenue Service developed Revenue Procedure 92-70 to assist shareholders of dormant foreign corporations. If the foreign corporation is dormant, the taxpayer may still have to file Form 5471 — but only minimal information is required for reporting.

Ownership Pre-dated Becoming a U.S. Person

One common situation we come across is when a U.S. person had ownership or interest in a foreign corporation before they became a U.S. person and therefore believe it is not required to be disclosed because they did not acquire the interest as a U.S. Person — but this is inaccurate. For example, a foreign person had 16% ownership interest in a foreign corporation before becoming a U.S. Person.  If they still have 16% ownership in the foreign corporation when they become a U.S. person, they may have to file Form 5471 for that tax year.

What is a Per Se Corporation?

The IRS has deemed some foreign corporations to be per se corporations. When a corporation is a per se corporation, the individual cannot disregard the entity. Rather the foreign entity must remain a corporation under U.S. tax law, such as a Sociedad Anonima.

When is Form 5471 Filing Due?

The Form 5471 is due to be filed on the same date the Taxpayer files their U.S. tax return.

How to File a 5471 Extension?

If a taxpayer requires an extension of filing Form 5471,  they would file an extension on Form 4868 for their regular tax return and then the 5471 will go on extension as well.

Categories of Filers

Not everyone who has ownership or interest in a foreign corporation must file Form 5471. Rather, the form is required by individuals who fall into one of the five categories of filers. And, just because a person is a particular category filer in one year does not mean they will meet the requirement to file as that same category in the subsequent year. After the initial 5471 is filed, the Taxpayer may be able to file the simpler Form 8938 in subsequent years.

GILTI

GILTI refers to — Global Intangible Low-Taxed Income. The GILTI rules require certain U.S. Persons with foreign corporations to pay tax on certain money that they would not otherwise have to pay tax on, before the implementation of the TCJA. Taxpayers may have several additional tax forms to file if they have issues relating to GILTI.

Subpart F

The Subpart F tax regime requires certain passive income and other income generated from Controlled Foreign Corporations to be taxed in the U.S. — even if the income has not yet been distributed to the U.S. shareholder. In other words, U.S. shareholders may have to pay a tax on their prorated share of current year earnings and profit despite none of the income being distributed to the taxpayer. 

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.