IRS Form 5471 is a tax form for foreign companies owned by US persons. In most cases, form 5471 applies to US citizens and residents who own foreign corporations. It does not matter which country a US person lives in. If that person owns stock in a foreign company as a director or officer, then the IRS has to be informed about such an interest via Form 5471.
The minimum percentage of stock ownership in a foreign company which qualifies a US person (green card holder or citizen) for mandatory filing of Form 5471 is 10%. So, for example, if you own a Panama corporation, a Hong Kong corporation, or have invested in stocks of a foreign company in which you hold more than 10% stake, then that holding or ownership has to be disclosed to the IRS through Form 5471.
It is important to note that Form 5471 is not a tax return. It is simply an informational return. Form 5471 does not carry any obligations with it as to make payments to the US government. The only monetary obligations associated with Form 5471 is any penalty that is payable in case of non-filing.
However, Form 5471 is used by the US government to track people who may be hiding assets in order to avoid paying taxes on those assets. There is no tax requirement associated with Form 5471. The IRS simply wants to have information about foreign assets of US persons.
Some people may have foreign assets for completely legitimate reasons like risk diversification, the ability to hold foreign currency, or genuine international business expansion. For some people, having foreign assets does offer some tax benefits. The United States has tax treaties with various countries and it is perfectly legal for businessmen to take advantage of these treaties and avail foreign tax credit.
Form 5471 simply allows the IRS to keep tabs on what US persons own abroad.
Who needs to file Form 5471?
Form 5471 is required by US citizens and green card holders who are officers, directors, or shareholders of a foreign corporation. A foreign corporation can be any legal entity which has been formed under the laws of a country outside the United States. The word corporation does not imply that only entities which are called “corporation” under foreign law will be treated as foreign corporations. The IRS will regard any non-US entity in which the owners have limited liability as a foreign corporation.
Even large companies like Apple and General Motors that have subsidiaries in foreign countries have to file Form 5471. So, regardless of whether you live in the US or not, if you own a foreign company, open your own business in a foreign country, or have a US company which has an interest in a foreign company, or if a company has a subsidiary in a foreign country, all of those instances mandate the filing of Form 5471.
Keep in mind that if you live outside the US for taking advantage of tax benefits, then filing Form 5471 will not take away those benefits. As long as you do everything legally, you can disclose your foreign asset ownership and still enjoy all the legal tax benefits that exist.
The only way you can exempt yourself from filing Form 5471 is to renounce your US citizenship or give up your green card, if you have one. Even changing the non-US entity from corporation to partnership will not resolve your issue because you would then have to file Form 8865 or 8858, both of which are equally burdensome.
Passing on ownership of the foreign business to a foreigner spouse or a friend will also not work. Neither will putting an island law firm’s name work as you would still have to file Form 5471. If you are the ultimate beneficial owner, then you have to file Form 5471.
Categories for filing Form 5471
There are 3 main categories of filers that IRS classifies for filing Form 5471. The first is a US person who acquires 10% or more stock in a foreign corporation as an officer or director. This category has to report a minimal amount of information about the acquirer and the corporation.
The second category of filer is for a US person who acquires additional stock in a company, taking the holding to over 10%. Alternatively, if the US person sells stock and takes the holding below 10%, then both such instances come under category 2. The amount of information to be reported under this category is quite large. Income statements, opening and closing balance sheets, and identity information all need to be compiled for this category.
The third category applies to a US person who owns over 50% of stock in a foreign corporation. Disclosure requirements are similar to category 2 with the addition of undistributed earnings and reportable transactions.
The best time to file Form 5471
Form 5471 should be filed along with your annual income tax return if you are filing as an individual. For corporates, the Form 5471 filing should be attached to the annual corporate tax return.
It is a good idea to file Form 5471 by March 15th if it is being filed by a corporate. Individuals can file by April 15th and expats can file by June 15th.
Penalties for non-filing
Penalties for not filing Form 5471 can start from $10,000 and run up to $50,000. The initial penalty is $10,000 for each tax year for not filing Form 5471. Then, an additional $10,000 penalty is levied if you do not provide foreign asset ownership details within 90 days of the IRS notice for non-filing of Form 5471.
After the 90-day window, an additional penalty of $10,000 is levied for every 30 days of non-compliance. This way, the penalties for failure to file Form 5471 add up and the maximum limit is $50,000 before more serious measures are pursued by the IRS.
Having outlined the penalties, it is important to point out that these penalties are not like taxes. Even if your foreign business entity is not making profits, the penalties still have to be paid. Taxes get levied only when the business makes a profit, but penalties are more severe.
The IRS estimates that the time to learn about Form 5471 and prepare the filing is around 120 hours. Given the filing requirements of Form 5471, the whole process is relatively tedious and time-taking. You would ideally want to work with a tax professional to file your Form 5471. You would want to make sure that everything is in order and that you because the penalties for non-compliance can be quite steep, as outlined above.
If you are a US person and have a substantial interest (greater than 10%) in a foreign entity, then you have to satisfy the reporting requirements of Form 5471. It is an important part of the tax law and has to be filed one way or another and the information has to be disclosed to the IRS.