Form 5471 Filing Facts for US Tax Filers
While it would appear that there are an infinite number of international information reporting forms required for taxpayers with overseas accounts and assets, Form 5471 is one of the more common and complicated forms. That is because unlike some other forms such as FBAR and Form 8938 which simply require the taxpayer to report the account or assets maximum value, Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) requires most categories of filers to prepare balance sheets (BS) and profit and loss statements (PLs) — along with detailing and other complex information surrounding CFC (Controlled Foreign Corporation); Subpart F Income; GILTI and more. In general, the more complex that the foreign business is, will dictate the complexity of preparing the Form 5471 for that business — multiple foreign corporations may require multiple Form 5471s each year. With that said, there are some important factors to consider when sitting down to prepare Form 5471.
Do You Even Need to File the Form 5471?
Especially due to the complexity of Form 5471, the first very important threshold question is to determine whether or not you actually have to file the form. For example, depending on which category of filer the taxpayer qualifies as, it will determine whether they have to report the Form 5471 only in the current year when there is a triggering event (such as becoming a US person and/or acquiring more than 10% of a foreign corporation) or whether there is an annual reporting requirement, such as when there is a Controlled Foreign Corporation.
Do You Qualify for an Exception?
There are some exceptions to filing Form 5471 that taxpayers should become familiar with, so they can determine whether or not they are required to file the form. For example, are there other similar categories of filers for the same corporation, in the same year that are already filing the form so it does not have to be duplicated by all shareholders in the same category of filer? Likewise, depending on the status of the foreign corporation, the taxpayer may qualify to file a Dormant Form 5471 in accordance with Revenue Procedure 92–70 — which results in much more simplified reporting.
Which Category of Form 5471 Filer(s) Are You?
There are five (5) main categories of Form 5471 filers, noting categories (1) and (5) can be broken down further into subcategories and a single taxpayer may fall into several different categories of filers. The reason why this is so important is that depending on which category of filer a taxpayer qualifies as will determine whether or not they have to file multiple schedules — or have a much more limited reporting requirement. For example, if a taxpayer qualifies as a category four (4) filer, they will have significant reporting — while some of the other categories have less reporting required.
Form 5471 and 8621 (PFIC) Cross-Over
It is not uncommon for foreign corporations to qualify as both a corporation that must file under Form 5471 — as well as a Passive Foreign Investment Company which will require a Form 8621. Form 8621 refers to PFIC (Passive Foreign Investment Companies). If a company qualifies to file both for Form 5471 and 8621 (PFIC), they will generally not be required to file Form 8621 but are still required to file Form 5471. There will also be some complications involving items such as Subpart F versus PFIC Excess Distributions, but the taxpayer can lean on the 5471 rules (which while they are not great, they are typically better than 8621/PFIC tax regime).
Late Filing, Penalties, and Avoidance
In the past 5- to 10-years, Internal Revenue Service has significantly increased enforcement of penalties for taxpayers who do not timely report their foreign accounts, assets, and investments. The Form 5471 late filing penalty starts at $10,000 but can go up significantly depending on how many forms were missing each year — and whether or not there was a continuing penalty. Taxpayers may reduce or avoid penalties by qualifying for one of the IRS-approved amnesty programs and/or qualifying for reasonable cause. To avoid all the incorrect misinformation you will undoubtedly find in your online research quest, you should speak with one or more Board-Certified Tax Law Specialists who specialize exclusively in international tax reporting and compliance.
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