Warning For U.S. Taxpayers With Interests In Foreign Corporations – You May Be Writing A Check To IRS.
If you own an interest in a foreign corporation, you may be required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. It is one of the most complex reporting obligations in the U.S. offshore information tax reporting regime and for U.S. taxpayers not complying could lead to rather large penalties. A taxpayer who fails to file a “substantially complete” Form 5471, absent reasonable cause, is subject to severe monetary and other penalties, beginning at $10,000 per year per missed form.
It does not matter where you live, if you are a U.S. person with an ownership interest of at least 10% in a foreign corporation, the IRS wants to know about it and you must file Form 5471. Even if you live abroad and qualify for the Foreign Earned Income Exclusion, you must still file Form 5471.
Additionally, the statute of limitations remains open for failure to file a Form 5471 on the taxpayer’s entire income tax return until the IRS receives a substantially complete filing. This subjects your income tax return to a longer period of audit scrutiny.
The IRS utilizes Form 5471 to have a complete transparency of what U.S. persons own interests in foreign corporations. It is merely an informational return and has nothing to do with the computation of any tax. This is similar in purpose to FBAR’s which is a separate informational return filing that taxpayers with foreign bank accounts are required to file on an annual basis.
Who Has to File?
If you are a U.S. person who is an officer, director, or shareholder in a foreign corporation (that is a legal entity formed under the laws of a country other than the United States) you need to comply with the requirement to file Form 5471.
There are four active filing categories with different filing requirements for those who meet each separate category description. If you meet more than one category description, you can file once but must include all of the information required for both categories.
For the majority of the categories, a U.S. person is defined as any of the following: a U.S. citizen or resident, a domestic U.S. partnership, a domestic U.S. corporation, or a domestic estate or trust.
The categories are as follows:
Category 2: This category applies in the year when a U.S. person acquires 10% or more of the stock in a foreign corporation as an officer or director.
Category 3: This category applies to any U.S. person who adds to their stock in a company, thereby surpassing the 10% minimum ownership, or any U.S. person who sells their stock in a company so that they own less than 10%.
Category 4: This category applies to any U.S. person who owns more than 50% of the stock of a foreign corporation.
Category 5: This category applies to any U.S. person who owns at least 10% of a “controlled foreign corporation” or CFC.
No matter which category you may fall in, the penalties for not filing Form 5471 would be the same.
The penalty for not filing Form 5471 (or doing so incorrectly) is $10,000 for each tax year. An additional $10,000 will be charged if the information is not provided within 90 days after the IRS has mailed a notice of failure to the U.S. person. After that, an additional $10,000 penalty will be applied each 30-day period until the information is filed. The maximum penalty is limited to $50,000 for each failure but considering that multiple years of non-compliance may be involved, you can see how this amount can grow even bigger.
Keep in mind that the foreign corporation does not have to have any profits for the penalties to apply. This is a penalty for a failure to file an informational report, not a tax that results from the information provided on the form.
It is possible to get these penalties abated due to “reasonable cause” which is why the hiring of qualified tax counsel is essential to pursue such a result and to make sure that your Form 5471 filings are acceptable to the IRS.
When to File
Form 5471 should be attached to your income tax return if filing as an individual, or with your corporate tax return if filing as a corporation.
The corresponding due dates of each type of filing apply as well. For example, Form 5471 is due by March 15th if filed by a corporation. If filed by an individual, it would be due April 15th, or June 15th if you are an expat. Now if any income tax return is put on extension, the due date for the Form 5471 also follows the extended filing deadline of the underlying income tax return.
What Should You Do?
You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.