Form 5471 IRS Full Offhsore Voluntary Disclosure Program (OVDP) for Controlled Foreign Corporations

According to conversations I have had with several IRS OVDP examiners, the IRS has trained its offshore auditors to be on the lookout for unreported bank accounts more than likely to be held by foreign entities, rather than directly by a US person. One auditor told me that the IRS estimates that 70% of all unreported income and foreign bank accounts is held by various entities.

These include foreign partnerships, foreign trusts (and foundations), and foreign-controlled corporations, each with additional — onerous — and I mean onerous, reporting forms that may be required.

The danger of unfiled Form 5471s

For individuals with FBAR filing requirements and unreported foreign income, the benefits of using one of the OVDP programs is that that they can limit their FBAR penalty risk and lower chances for criminal charges (although criminal charges are probably not as routine as you think).

For those with FBAR problems, unreported income, AND Controlled Foreign Corporations (CFCs), the issues become more accurate because of the Form 5471 penalties, and that OVDP initiatives allow those potential penalties to be rolled in with a standard offshore penalty or streamlined 5% penalty (or 0% penalty for those streamlined submissions for those who live overseas).

For the CFC, the reporting form, if required, is a Form 5471. The penalties for failing to file a Form 5471 are $10,000 per year, or up to $50,000 per year if the IRS has told you to file a Form 5471 and you have failed to do so.

Now the added sting —- if you fail to file an IRS Form 5471, the statute of limitations on assessing a tax from a foreign corporation does not begin to run. Meaning the IRS has "forever" to assess a tax, so you can't just sit back and wait for the problem to go away without some risk.

Do you have a Form 5471 obligation?

One of the threshold questions to ask, is do you even need to file a Form 5471? A Form 5471 is required to be filed when one of two issues are present: you or some combination of a US person who owns at least 50% of the foreign corporation and you own at least 10% of that foreign corporation. Or to put it another way, if you own 10% of a foreign corp, but are the only US person, you do not need to file a Form 5471. But say you own 10% of the stock, and your family, who are all US persons own 45%, then you do have a Form 5471 filing obligation.

Confusing, right? Especially if you don't happen to know who the other stockholders are and if they are US persons.

A way to get around the Form 5471 filing requirement is if you file a form 8858 each year noting that the CFC is disregarded and you made the proper "check the box" election. But you only have a limited amount of time to make such an election, and some foreign entities are stuck being CFCs.

Can you use the Streamlined OVDP if you have unfiled Form 5471s?

The Streamlined OVDP, whether foreign or domestic, has some nice advantages to it over the Standard OVDP and may be a very attractive option for those who weren't willfully trying to avoid their IRS obligations. So a common question we are asked is, can one use a Streamlined OVDP when there are unfiled Form 5471s?

The answer is yes. Yes, you can. The requirement is that you are not currently under audit, and did not act willfully (or willfully blind). This holds true for all of the other foreign reporting forms like Form 8865 for Foreign Partnerships, Form 3520 for Foreign trusts (or foundations), or a Foreign-Owned U.S. Corporation for Form 5472.

Three Year Rule and Form 5471 IRS OVDP

Disregarding an entity can avoid the dreaded Subpart F income. The time to make an election to disregard a CFC is up to three years, so it is quite helpful that a Streamlined OVDP can be done, and avoid Sub-part F income for the look back period. Now, of course, your statute to assess Form 5471 penalties is still technically open, but this is an area where the IRS has limited resources and would perhaps be more interested in looking at the 3-year period filed rather than the years you did not.

Can you opt-out of the Standard OVDP with unfiled 5471s?

Yes, you can. But note: That means the standard 27.5% offshore penalty (2011 OVDI 25% penalty or 50% OVDP FAQ 7.2 penalty are no longer on the table). So the IRS OVDP examiner can assess you FBAR penalties and in additional, may assess you the $10,000 penalty for IRS Form 5471 non-filing. Need assistance with unfiled or misfiled FBARs or 5471's? Contact us. We can help.

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