How to understand IRS Form 5471 better than the IRS does

Note: Some of this information maybe obsolete thank to Tax Reform of 2017. Visit our 2020 IRSMedic Form 5471 Practice Guide here for updates.

IRS Form 5471 is a complicated form of which it is natural to have many questions about. Here are other essential IRS Form 5471 articles:

Who has to file Form 5471?

Per irs.gov:

Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.

The use of "certain" really leaves a lot of room open for interpretation, doesn't it? The different categories of filers is as complicated and convoluted as you would expect from the IRS.

Subpart F creates a rationale to extend Form 5471 filing requirements

The original 1960 law only imposed the foreign corporation filing requirements to corporations — not to individuals. But this was changed to include individuals through the tax law changes of 1962 when Subpart F was born.

The entire purpose of Subpart F was designed to prevent U.S. citizens and resident individuals and corporations from deferring the recognition of otherwise taxable income through the use of foreign entities. Subpart F is a terrible tax treatment designed to encourage people not to invest overseas. Part of the encouragement not to put assets overseas is to require individuals to have the same reporting obligations as large corporations.

What started out as a requirement for US corporations to file reports on its corporations controlled overseas, morphed into a requirement that a person who has pretty much any foreign entity (originally just foreign corporations but now any foreign entity, really) to engage in wasteful tax compliance work.

The big corporations with fancy accounting teams are well equipped to fill out Form 5471. But individuals that have to fill out this onerous form should be prepared to spend quite a bit of time filing it. The IRS estimates that it would take someone about 123 hours and 16 minutes to learn about and prepare the Form. So just 15 eight-hour days.

Oh, and in 1962 the penalties for not filing were updated to be…well…horrendous. More horrendous than we even originally thought. Read about the insane Form 5471 penalties here.

Understanding Form 5471 filing requirements

It’s important to know who the majority owner of the foreign corporation is, as they are responsible for filing Form 5471. If there are 10 shareholders in the corporation, only one Form 5471 needs to be submitted. You will need to state on your Form 1040 that you know you have a Form 5471 filing requirement, that it has been submitted, and provide the identifying information.

If you’re unsure if the Form has been filed, you’ll want to do your best to find out as there are stiff penalties for non-filing. You can't call the IRS to find out, you’ll have to deal with the corporation directly. Check in with them, tell them you are a US shareholder and ask if they can ascertain if Form 5471 has been filed. It’s worth your time!

Form 5471 Offshore Voluntary Disclosure Program (OVDP) and Streamlined Processes

Even taxpayers who were aware of the requirements that worldwide income is taxable, or those who have gone through a full eight-year OVDP or a three-year Streamlined disclosure, have failed to properly file Form 5471 for all foreign corporations. Many tax professionals, even those who have become familiar with the FBAR form, don't know about all the foreign reporting forms.

Tax Reform changed Form 5471 filing requirements.

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