1. Failure to File
The most common Form 5471 reporting mistake is simply failing to file. In many cases, Americans living and working outside the U.S., recent immigrants, foreign citizens who are resident in the U.S., and U.S. children who received gifts or bequests from their foreign parents are simply unaware of their Form 5471 filing obligations.
Beware: The statute of limitations on assessment for the taxpayer’s entire return (not just items related to the Form 5471) remains open until three years after the IRS receives a completed Form 5471.
U.S. persons with ownership or signature authority over foreign businesses must fully educate themselves regarding Form 5471 reporting obligations and seek advice from experienced U.S. tax legal counsel.
Those who fail to resolve prior reporting errors remain exposed to substantial penalties and possible criminal prosecution. U.S. courts have not been sympathetic to uninformed foreign business people who failed to investigate their reporting obligations. In some cases, U.S. courts have imposed very high penalties. Many who deliberately concealed offshore corporations have been prosecuted.
2. Most Dormant Foreign Corporations are not Dormant.There are special simplified Form 5471 filing rules for a foreign dormant corporation. IRS Revenue Procedure 92-70 specifies specific, conditions that must all be met in order for a foreign corporation to be considered dormant. The rules are very specific and restrictive.
3. ALL accounts and assets need to be reported on an Form 5471.
A person required to file an Form 5471 must report all foreign financial accounts and assets, including receivables, intangibles and tangibles, regardless of size.
4. There are Different Categories of Filers
There a typically four types of filers (categories 2-5), since they eliminated category 1.
Category 2: A person who owns at least 10% or more of the foreign corporation
Category 3: A person acquires stock in total of stock ownership exceeds 10%
Category 4: A U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period
Category 5: A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.
5. Failure to Report If You Own More Than 10% of the Foreign Corporation.
Many individuals with mere ownership/investment interest in a foreign corporation do not consider themselves the owner of a corporation simply because they own more than 10%. In other words, if you were to purchase 15% of a foreign corporation but did not have any input or other management of the Corporation, you probably would not consider yourself to be an “owner” as much as an “investor.” With that said, if you own more than 10% of a foreign corporation then your required to file a form 5471 annual return each year (certain exceptions/exclusions apply)
6. You Controlled the Corporation for More than 30 Days
Even if you only control the corporation for a small period of time, usually exceeding 30 days, you are still required to file form 5471. In fact, if you had control over the foreign corporation for at least 30 days, than you also need to file various different schedules regarding specifics of the Corporation. Depending on whether you are a category 2,3,4, or 5 Filer will help determine which schedules you have to file.
7. The Business Does Not Need to be a Controlled Foreign Corporation
From a general standpoint, the IRS has very strict rules regarding certain types of income when the corporation is a foreign corporation and a controlled foreign corporation. A controlled foreign corporation (CFC) is when U.S. persons own more than 50% of the corporation and each shareholder owns at least 10% (attribution rules apply). Therefore, simply because you do not own a foreign corporation that is considered a CFC, does not mean you are exempt from filing Form 5471.
8. You Do Not Need to have Subpart F Income
The Subpart F income eliminates deferral of U.S. tax on some categories of foreign income by taxing certain U.S. persons currently on their pro rata share of such income earned by their controlled foreign corporations (CFCs). Subpart F income is a specific type of income which is usually passive income in which a person has to pay tax on (even if that money was not distributed). Whether or not your controlled foreign corporation has subpart F income is important, but not respect to meeting the threshold performance of having to file a Form 5471.
9. You Did Not Need to Have Received Any Income
Form 5471 is an informational tax return to report information regarding the foreign corporation. If income was paid to owners or shareholders of the business, it would be reported on the return, but it is not a threshold requirement of having to file the Form 5471. In other words, if you otherwise meet the threshold requirement as a category two, three, four, or five filer — than the mere fact that you did not earn any income from the foreign corporation does not exempt you from filing.
10. It Does Not Matter Where You Live
Whether or not you reside in the United States or not, you are still required to file Form 5471 when you otherwise meet the requirement as a category two, three, four, or five filer. If you live abroad, you must still file this form.
11. Some Foreign Corporations are Per Se
A common scenario for individuals who owned LLCs in the United States is to disregard the entity and file the business information directly on a form schedule C which is filed with a US tax return. While a person can feasibly disregard a foreign entity as well, the IRS lists hundreds of per se corporations which are de facto — and which cannot be disregarded. In other words, if you own this particular type of foreign entity, then you must file a form 5471 and cannot otherwise disregard the entity.
12. Failure to Substantially Complete Form 5471
The U.S. Treasury and IRS have been aggressively asserting more and different penalties for failure to report required foreign information, even when all U.S. income taxes have been paid. This can also occur even when the Form 5471 is filed, but the IRS considers there is not substantial compliance in providing required information on the form, e.g., the Category of Filer boxes is not completed.
There are actually no rules in the Internal Revenue Code or regulations that set forth guidance as to how taxpayers are to determine when they have substantially complied with the Form 5471 filing requirements. The closest guidance taxpayers have is in a document the IRS provides to its agents on penalties that apply if certain categories of U.S. shareholders fail to comply with the reporting requirements of Form 5471. The International Practice Unit (IPU) discusses two types of errors that may cause a Form 5471 to be substantially incomplete: (1) errors apparent on the face of the form and (2) errors beyond the face of the return. The first type is the issues mentioned above: failure to complete the Category of Filer part of the form or completing it incorrectly. The second is errors that would be discovered when an agent was reviewing the information and backup to data on the return, such as where the intercompany transactions to be reported on Schedule M were under- or overstated. There is not a specific trip point as to what constitutes (or does not constitute) “substantial compliance”, but is to be based upon the magnitude of the failure and how this might impact an agent’s examination. It should also be noted that the IPU reminded the agents that even a dormant foreign corporation required to file the form must comply (although to a lesser extent).