Quickly — What is Form 5471?
Per the IRS website:
"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 IRC sections 6038 and 6046, and the related regulations."
What this means that if you are a shareholder of a controlled foreign corproation who owns more than 10% of the stock you have a Form 5471 filing obligation. This law started out as a requirement for US corporations had to file reports on its corporations controlled overseas. It has morphed into a requirement that says that a person who has who have a 10% interest in a controlled foreign corporation has to engage in time-consuming and incredible onerous compliance work. How onerous? When you start reviewing some of the things that you can be penalized for below, you begin understand how unbelievably complicated Form 5471 is. But first a word about what Form 5471 penalties are.
Form 5471 penalties
Typically, Form 5471 penalties are $10,000 per each form that is not filed or is not substantially complete. This penalties can increase up to $60,000 if the IRS asked for a correct Form 5471 and one is not provided timely, or at all. Here are some more details:
- You are required to file Form 5471 even if you don't owe any money (or even if you get a refund!). Remember, Form 5471 is a reporting requirement, not a tax form.
- Form 5471 should be filed with your income tax return. Extensions do apply to this form, so if you get an extension on your 1040 it also applies to Form 5471.
- If you file late, inaccurately, or not at all the Base Penalty is $10,000 per form per year per foreign corporation.
- If the information is not provided within 90 days after the IRS mailed a notice indicating the failure to file, an additional $10,000 penalty (per foreign corporation) may be charged for each 30-day period during which the failure to file continues after the 90-day period has expired. For each failure, the additional penalty is limited to a maximum of $50,000.
- There is also a 10% reduction of foreign taxes available for credit under I.R.C. Sections 901, 902, and 960 which can be applied in addition to the monetary policy per I.R.C. Section 6038(c). If the failure continues 90 days or more after the date the IRS mails notice of the failure, an additional 5% reduction of foreign taxes available for credit is made for each 3-month period during which the failure continues after the 90-day period has expired. The amount of the reduction has several limits such as the greater of $10,000 or the amount of the income of the foreign corporation for its annual accounting period with respect to which the failure occurs.
- Failure to file Form 5471 and your entire tax return remains open for audit indefinitely!
Form 5471 Penalty triggers
Aside form non-filing, Form 5471 penalties can be assessed for forms that are substantially incomplete. We will now turn our discusison as to the types of things the IRS considers substantially incomplete. Note: Form 5471 issues are litigated routinely. The IRS's position is not always what a court will agree with.
Using the wrong accounting method can trigger Form 5471 penalties
International Financial Reporting Standards (IFRS) is the accounting method that are used in 110 countries across the world. There are key differences between IFRS and the Generally Accepted Accounting Principles (GAAP) that is used in the United States and for IRS tax compliance. And yet even IFRS can vary country-to-country. Form 5471 must be filed out according to GAAP. This can require huge time to "translate" IFRS books into GAAP.
Variance may lead to penalties
Multiple Form 5471s for the same entity may need to be filed depending on how many US shareholders of a CFC there are and their ownership percentage. Still Schedule M should be consistent among filers. Sometimes though, you don't know how a co-owner of shares filed. This is critical that you are all on the same page.
Look for missing Form 926 -and new traps from Tax Reform
Oftentimes a review of Form 5471 will indicate that a Form 926 is required as well. IRS Form 926 is the “Filing Requirement for U. S. Transferors of Property to a Foreign Corporation." Transfers include, but are not limited to:
- A transfer by USP of property to a foreign corporation in exchange for the corporation’s stock, where USP, alone or together with others making contemporaneous transfers, controls the corporation immediately after the exchange.
- An exchange by USP of stock or securities of a domestic corporation for stock of a foreign corporation pursuant to a plan of reorganization.
- A transfer by a domestic corporation of its assets to a foreign corporation in a reorganization.
- Can be tangible or intangible property
Other types of Form 5471 penalty triggers
Other types of 5471 errors that could be consider substantially incomplete and thus lead to penalties ( this list is NOT exhaustive).:
- Related parts transactions are not reported correctly.
- Wrong boxes checked on filer categories.
- Acquisitions and dispositions of corporation stock not reported.
- There is a failure to report a corporate reorganization.
- Proper reference ID numbers for foreign parties are missing.
- Schedule C income statement net income does not correlate with a change in the beginning-to-ending retained earnings on the Schedule F balance sheet.
- Schedule F balance sheet does not balance.
- Schedule J issues including failure to include current year or accumulated Subpart F earning, or Section 956 inclusions which are reportable on Schedule I; missing current year distributions of previously non-taxed earnings and dividends which are reportable on Schedule I.
- Using US dollar for earnings and profits instead of the foreign currency.
- Schedule M includes interest, dividends, rents, or royalty income or expenses but those items are not reported separately on the balance sheet and there is no Subpart F income reported.
- Category 2 or 3 filers boxes checked but Schedule O is not completed or attached.
Form 5471s are hard to get right!
If you think this list is rather absurd, hold on. There is one more important trigger. There is even a Form 5471 penalty for mistakenly over-reporting information!
So now you probably have a better idea of what makes completing an IRS Form 5471 so difficult. There are an incredibly amount of minefields.
In fact, we know from many "Big Four" employees we have interviewed for positions over the years that the Big Four firms want little to do with Form 5471s — except for their largest corporate clients. Think about this: Certain IRS tax compliance is so difficult that the biggest public accounting firms in the world are incredibly reluctant to handle Form 5471 compliance. It is difficult to think of a larger indictment of our complicated tax code. They know full well what is needed and are saying "no thanks" more and more. Form 5471 is no place for rookies, or even the merely competent. It takes scarce human capital to get the job done correctly.
If you're concerned that you may have unfiled, incorrect, or misfiled IRS forms, including Form 5471, contact us. We have helped thousands of US taxpayers around the globe. Call us at 888-727-8796 or email firstname.lastname@example.org.