In order to answer the question of what a Form 5471 Offshore Voluntary Disclosure is, it's probably a good idea to start with answering just what IRS Form 5471 is.
Form 5471 is an informational return used to report your interest in a foreign corporation. Think of it like an FBAR form, but instead of reporting a bank account, you are reporting an interest in a foreign corporation (that probably has foreign bank accounts). The first thing you need to understand is that unlike the FBAR, Form 5471 is stupidly complicated.
The Burden of Form 5471
To get a sense of how onerous this form is, we offer a comparison. Most IRS forms include in their instructions the Service’s estimate of the burden on the taxpayer. For example, completing and submitting a Form 1040, the regular individual income tax return, is estimated to take the average taxpayer about 4 hours. Form 5471 is a little, let's say, "unique." Here’s the table included in the instructions:
Yet, it just takes moments to learn Form 5471 is not very nice. That's right, over two full working days, just to learn about the form. Hmmm…if only there was some sort of "constitution" to protect citizens from these sorts of things.
The “Recordkeeping” referred to generally means the type of balance sheet and profit and loss statement normally maintained by a corporation in the course of business. However, even if you are fully prepared with all your records before starting, the IRS still estimates it will take a taxpayer more than 40 hours to understand and prepare this form. It may be the most complex IRS form we’ve ever dealt with.
Do I Have to File a 5471?
To answer whether or not you need to file a 5471, the question you need to ask yourself is, "do I have a 10% or greater shareholder interest in a foreign corporation?" If so, you likely have a 5471 requirement, although the exact details of your filing varies depending on the percentage of that interest or your degree of control over the corporation.
What if I Didn’t File a Required 5471?
As we have mentioned in the past, the penalties for failure to file can be very steep. If you have failed to file a Form 5471 for one or more accounting periods, you are in one of the following two categories:
- Failed to file a required 5471 BUT reported all income correctly on your personal income tax return
- Failed to file a required 5471 AND did not report income from the foreign corporation on your personal income tax return.
What to do when you Failed to file Form 5471 and there was no change to income
If you failed to file any outstanding 5471(s), you will need to hire tax professional to prepare your missing Form 5471s, attach those to amended income tax returns — Form 1040X — showing no change in income and simultaneously request an abatement of penalties due to non-willful failure to file. The IRS has stated that in these cases, they are willing to abate penalties if the back returns are filed correctly in the manner described above.
What to do when you failed to file Form 5471 and there was an increase in income
In this case, the recommended course of action is to prepare all missing Form 5471s and hire a tax attorney to guide you through the Offshore Voluntary Disclosure Program/Initiative (OVDI/OVDP) under the 2014 protocol.
If you have unreported foreign income from any source, our recommendation is to join the Offshore Voluntary Disclosure Program to protect yourself from criminal and civil penalties. The outstanding forms can them be filed as part of the program, and any penalties will be rolled into the standard Offshore Penalty. Note this penalty is referred to as the FBAR-equivalent penalty, even though the this is a non-FBAR case (complicated, huh?) If you need assistance with any unfiled or misfiled forms, contact us. We can help.
For common OVDP questions and answers click on the box below.
