Who Needs to File Form 5471 for a Foreign Corporation?

Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” is a disclosure document required by the Internal Revenue Service (IRS). It is for U.S. individuals and entities with certain ownership interests in foreign corporations. The form’s purpose is to monitor overseas assets and ensure compliance with U.S. tax laws on foreign income.

Determining Your Filing Requirement

A U.S. person’s obligation to file Form 5471 is determined by their classification into one of several filer categories based on ownership percentages and control levels within a foreign corporation.

A primary trigger for filing is being a “U.S. shareholder” of a “Controlled Foreign Corporation” (CFC). A foreign corporation is a CFC if U.S. shareholders own more than 50% of its stock by vote or value. A U.S. shareholder is a U.S. person who owns 10% or more of the foreign corporation’s stock. The filing requirement can also apply when a U.S. person acquires or disposes of stock, crossing the 10% ownership threshold, even if the entity is not a CFC.

Constructive ownership rules, which attribute stock ownership between related individuals and entities, also determine who must file. For instance, an individual may be considered to own stock that is legally held by a family member or a related entity. In some cases, stock owned by a foreign person can be attributed to a related U.S. person, a concept known as “downward attribution,” which can create a filing obligation.

The IRS defines five main categories of filers:

• Category 1: U.S. shareholders of Specified Foreign Corporations (SFCs).
• Category 2: U.S. citizens or residents who are officers or directors of a foreign corporation in which a U.S. person acquires a 10% or greater ownership stake.
• Category 3: U.S. persons who acquire or dispose of stock, resulting in a 10% or greater change in their ownership.
• Category 4: U.S. persons who had control (more than 50% by vote or value) of a foreign corporation.
• Category 5: U.S. shareholders who own stock in a Controlled Foreign Corporation (CFC).

Required Information and Schedules

Filers must gather substantial information for the form and its schedules. This includes general data about the foreign corporation, such as its name, address, and business activity. The corporation’s financial statements, including the income statement and balance sheet, must be translated into U.S. dollars and conform to U.S. Generally Accepted Accounting Principles (U.S. GAAP).

A required calculation is for the foreign corporation’s Earnings & Profits (E&P). E&P is a measure of a corporation’s economic ability to pay dividends to shareholders. It must be calculated according to U.S. tax principles, which can differ significantly from both foreign accounting standards and U.S. GAAP.

The specific schedules a person must complete depend on their filer category. Common schedules provide detailed financial insights:

• Schedule A: Stock of the Foreign Corporation.
• Schedule B: U.S. Shareholders of Foreign Corporation.
• Schedule C: The corporation’s Income Statement.
• Schedule E: Details foreign taxes paid, relevant for foreign tax credit calculations.
• Schedule F: The corporation’s Balance Sheet.
• Schedule J: Tracks the corporation’s accumulated E&P over time.
• Schedule M: Discloses transactions between the corporation and its shareholders.
• Schedule R: Reports any distributions made by the corporation.

The Filing Process

Form 5471 is not filed on its own but must be attached to the U.S. person’s annual income tax return, such as an individual’s Form 1040, a corporation’s Form 1120, or a partnership’s Form 1065. The form and all its required schedules are filed as a single package with the main tax return.

The filing deadline for Form 5471 coincides with the due date of the income tax return to which it is attached, including extensions. For individual filers, this is April 15, while for corporations, it is the 15th day of the fourth month after the tax year ends. An extension for the income tax return automatically applies to Form 5471.

If a U.S. person has an interest in multiple foreign corporations that meet the filing criteria, a separate and complete Form 5471 must be prepared and filed for each one. Each form must be individually attached to the income tax return. This requirement means the compliance burden can increase with each additional foreign entity, making careful record-keeping important.

Penalties for Non-Compliance

Failing to file Form 5471, or filing an incomplete or inaccurate form, results in penalties. The IRS imposes a base penalty of $10,000 for each annual accounting period of each foreign corporation for which a failure exists.

If non-compliance continues after the IRS issues a notice, further penalties apply. A person who fails to file within 90 days of an IRS notice is assessed an additional $10,000 for each 30-day period the failure continues. This continuation penalty is capped at $50,000, bringing the potential total penalty for a single form to $60,000.

Beyond monetary fines, a failure to file can result in a reduction of the foreign tax credits that would otherwise be available to the taxpayer, potentially increasing their overall U.S. tax liability. In cases of willful failure, criminal penalties, including imprisonment and substantial fines, may also be pursued.

The failure to file also impacts the statute of limitations. Normally, the IRS has three years to audit a tax return. However, if a required Form 5471 is not filed, the statute of limitations for the entire tax return remains open for assessment by the IRS until a complete form is submitted.