IRS Form 5471: Reporting Requirements for Americans Who Own Stock in a Foreign Corporation
As a U.S. citizen living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. Therefore, you are required to file a U.S. income tax return. U.S. citizens who are officers, directors, or shareholders in certain foreign corporations must file IRS Form 5471 and attach it to their income tax return. Failure to file Form 5471 and filing an incomplete or incorrect form may result in a penalty of $10,000, unless the failure is due to reasonable cause.
Who must file?
There are four categories of filers (the Category 1 filing requirement has been repealed). U.S. citizens must file Form 5471 if they acquire stock in a foreign corporation which meets the stock ownership requirement (Category 3). A U.S. citizen who is an officer or director of a foreign corporation in which a U.S. person has acquired stock which meets the stock ownership requirement is also required to file the form (Category 2).
The remaining two categories are U.S. citizens who had control of a foreign corporation during the tax year (30 days or more – Category 4) and U.S. citizens who own stock in a foreign corporation that is a ‘controlled foreign corporation’ (‘CFC’ – Category 5). A CFC is a foreign corporation that has U.S. shareholders that own more than 50% of the voting power or total value of the stock.
What information is required?
All filing categories must provide identifying information, such as the name and address of the foreign corporation, U.S. ‘employer identification number’ (‘EIN’), if it has one, and information about its place of business and business activity.
Categories 3 and 4 must include an income statement and balance sheet and Categories 4 and 5 must provide detailed information about the foreign corporations retained earnings, Subpart F income and transactions between the foreign corporation and its shareholders and other related persons (Schedule M).
A $10,000 penalty is imposed for each tax year of each foreign corporation for failure to furnish the required information within the time prescribed (the filer’s income tax return filing due date). The penalty can also be imposed if a ‘substantially incomplete’ or incorrect form is filed. Criminal penalties may also apply and a U.S. shareholder may have to pay a penalty if it is required to disclose a reportable transaction and fails to do so.
Taxpayers who have not filed one or more required Forms 5471, have reasonable cause for not timely filing, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns, should file the delinquent information returns with a statement establishing reasonable cause for the failure to file.
IRC Section 965 – Treatment of accumulated deferred foreign income as Subpart F income
The recently announced tax reform (the 2017 Tax Cuts & Jobs Act, which was enacted on December 22, 2017) includes changes to the treatment of accumulated post-1986 deferred foreign income. IRC Section 965(a) provides that Subpart F income shall be increased by the accumulated deferred foreign income determined as of either November 2, 2017 or December 31, 2017. As such, a mandatory one-time tax (the ‘Transition Tax’) is imposed.
Please contact us with any questions you may have about IRS Form 5471. If you are uncertain whether you are required to file Form 5471, or whether you are subject to the Transition Tax, our team of tax professionals is here to help. Sanders US Tax Services specializes in U.S. tax return preparation for Americans abroad. Our tax professionals also speak Dutch and German.