Form 5471 and Dormant Foreign Corporations

The reporting requirements for IRS Form 5471 are confusing and time-consuming. You need to understand what 'category of filer' you are, which Schedules you should fill out, and? The Form has to be completed for every foreign corporation you are part of for every tax year. All so the IRS knows where your money is.

We've had clients incorrectly assume that because their foreign corporation is dormant, they don't have to worry about completing a Form 5471. Unfortunately, that is false. You still have a reporting requirement, albeit minimal. But even minimal requirements can still have penalties assessed against them.

What does dormant actually mean?

First, let's define dormant per IRS standards. Per Revenue Procedure 92-70, there are eight, very specific, conditions that must all be met in order for a foreign corporation to be considered dormant:

The foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation
No shares of the foreign corporation (other than the directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation party to a reorganization
No assets of the foreign corporation were sold, exchanged, redeemed, or otherwise transferred, except for minimis transfers described in 4 and 5 below
The foreign corporation received or accrued no more than $5,000 of gross income or gross receipts
The foreign corporation paid or accrued no more than $5,000 of expenses
The value of the foreign corporation’s assets as determined pursuant to the US generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000
No distributions were made by the foreign corporation; and
The foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in 4 or 5 above

If your foreign corporation indeed meets all of these requirements, now what?

You only need to complete page 1 of Form 5471 for each dormant foreign corporation; this includes your name and address, tax year, identifying number, category of filer, and the total percentage of the foreign corporation’s voting stock you owned at the end of its annual accounting period. Then complete corporate information such as the dormant corporation's annual accounting period and… you're almost done.

Just one last stylistic and functional suggestion

IRS forms are generally extremely detail oriented. They want to get as much information from you as possible, and have check boxes for everything. Except in this case.

If you are filling out a Form 5471 for your dormant corporation, you have to scribble a note at the top of the document. Per the instructions:

"The top margin of the summary return must be labeled 'Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporation'."

We take the time to tell our clients, "No. Really. That's how they told us to do that." Maybe a future iteration of the form can include a box: "Does your foreign corporation meet all of the requirements for dormant status?" Just a suggestion.

Tax Reform made big changes to Form 5471. Wathc below to learn more.

These are the most popular countries, after the US, that our clients come from. Click on the flag of the country of interest to learn the most common issues we encounter, and the strategies we use to solve them.

Australia