Having overseas business interests, or owning part of a foreign corporation, can be a rewarding and lucrative experience. That said, it’s not without challenges––especially when it comes to filing tax returns.
If you meet certain ownership requirements, the IRS needs you to complete and file what’s known as a Form 5471 with your tax return. Below, our team explores what IRS Form 5471 is, who needs to file this form, and how you can complete your return as quickly and efficiently as possible.
What Is IRS Form 5471?
Form 5471, or “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”, is an IRS form individuals may need to complete if they have an interest in certain types of foreign businesses. It’s especially relevant if someone has an ownership interest in a “Controlled Foreign Corporation” (CFC), which is a company more than 50% owned by U.S. shareholders.
We’ll break down the criteria below, but in short, any U.S. citizen, resident, Green Card holder, partnership, estate, trust, or business with at least a 10% ownership interest in a foreign business needs to complete this form.
- IRS Form 5471 is not a tax return. It’s an information return. The whole point of the form is so the IRS knows which U.S. residents and citizens have overseas interests––and to prevent tax evasion.
- It’s not optional to file Form 5471. If you meet the filing criteria, you must file the Form with your personal or business tax return for the relevant tax year.
- The form itself doesn’t dictate the amount of tax you owe, since it’s purely informational. However, you could face tax penalties if you don’t pay the amount of tax you owe.
The form contains various sections, or schedules, which capture different types of information about the interest(s) an individual has in an overseas corporation. Which schedules you complete depends on the type of interests you have––for example, you may need to report the company’s revenue or expenses, attach the company’s balance sheet, or declare your own earnings and profits from your ownership interest.
Form 5471 schedules are a little complex and you may feel overwhelmed trying to decipher which schedules you need to complete. The Gordon Law team is happy to help if you’re unsure which schedules apply in your situation and the types of information you need to provide.
So, if that’s how Form 5471 works, who actually needs to complete this information return? Let’s take a closer look.
Who Must File an IRS Form 5471?
Not everyone with an interest in a foreign corporation needs to complete Form 5471. You only need to file this form if you are a U.S. resident or citizen, or an entity such as a corporation or estate, and you fall into at least one of the five “filer” categories outlined by the IRS.
The categories are:
Category 1: Section 965 Transition Tax Filers
Category 1 applies to anyone covered by Section 965 of the Internal Revenue Code, which covers owners of Specified Foreign Corporations (SFCs). SFCs are CFCs or non-CFCs owned by U.S. businesses.
The point of Section 965 is to ensure that previously untaxed U.S. shareholder earnings face IRS taxation. The IRS transition tax rule is far less relevant now, as it primarily affected the 2017 tax year, but it’s still worth knowing about.
Category 2: Officers and Directors
Are you the director, or owner, of a foreign corporation? Then you could be a Category 2 filer.
It doesn’t matter if you actually own less than 10% of the corporation, or whether it’s a CFC or non-CFC. If you are an owner or director, then you should file under Category 2.
Category 3: Stock Disposition or Acquisition
If you buy stock in a foreign corporation, acquire more than 10% of ownership, or sell back at least some of your stock in the tax year, then you could be a Category 3 filer.
Category 3 applies whether it’s a CFC or non-CFC. All that matters is that the filer acquired or then sold or disposed of enough stock to reduce their ownership below the 10% threshold.
Category 4: 50%+ Ownership of a Non-CFC
If one individual or entity owns more than 50% of a foreign business, but the business is not a CFC, then they’re a Category 4 filer. This means, for example, if a U.S. citizen owns 60% of a British company, but the company is not a CFC, then the owner should file under Category 4.
Why might a company majority controlled by a single U.S. owner not be a CFC? Well, if the owner is the majority, or significant, shareholder, then an exception might apply where the business is not treated as a CFC.
Category 5: CFC Shareholders
The final category, Category 5, applies to shareholders who owned at least 10% of a CFC during the relevant tax year.
Category 5 filers are among the most common types of individuals required to file Form 5471.
Are There Exemptions to the Form 5471 Filing Requirements?
Yes. You may be exempt from filing Form 5471 if, for example:
- The foreign corporation elects to be treated as a domestic (U.S.) corporation
- Your ownership interest is below the threshold of 10%
- You only have constructive ownership, or indirect stock ownership, and the direct owner files instead
- The corporation has been inactive for at least an entire year (reduced filing requirements may apply)
If in doubt, err on the side of caution and call Gordon Law to check your filing requirements.
Form 5471 vs. Form 5472
Since both Form 5471 and Form 5472 relate to cross-border activities, it’s sometimes confusing to know which form to file with your tax return. But there’s one key difference between the forms to bear in mind.
- U.S. taxpayers, including those with Green Cards, file Form 5471.
- U.S. companies that are at least 25% foreign owned, or foreign corporations engaging in U.S. business or trade, should file Form 5472.
If you have any doubts about which IRS tax forms to complete, don’t worry. The Gordon Law team can help with any tax return questions or queries you have.
What Is the Due Date for a Form 5471?
You should normally file a Form 5471 alongside your annual tax return.
- If you’re filing as an individual, the deadline is April 15.
- If you’re filing as a partnership, or corporation, the deadline is March 15.
For any individuals living abroad who are required to file a Form 5471, the deadline is June 15.
Can I Extend the Form 5471 Filing Deadline?
Yes, you can request an extension to file Form 5471, but to be clear, this only gives you more time to file. You must still pay any tax owed by the original deadline or you could face tax penalties.
- If you need more time to file Form 5471, and you’re filing late as an individual, you can complete IRS Form 4868 to request a six-month filing extension.
- There’s no need to provide the IRS with a reason for your request—all you need to do is file Form 4868.
- If you don’t pay your taxes on time, you could still face IRS penalties and interest on tax owed. So, remember––this is only an extension for submitting your return. Not an extension on time to pay taxes owed!
If you’re worried about missing a filing deadline, or you’re concerned about tax penalties, contact the Gordon Law team and our experienced attorneys will be happy to help.
What Happens if I Miss the Deadline?
Falling to file Form 5471 on time can be costly. In fact, the IRS automatically imposes a $10,000 penalty for each missing form/tax year. The penalties increase if the IRS contacts you about the missing return and you don’t file within 90 days––up to a maximum of $60,000 per form.
You could also face a formal IRS tax audit due to the overdue tax returns. Not only is this a highly stressful situation, but it could also result in further penalties down the line. Contact us urgently if you’re facing Form 5471 late filing penalties and we’ll help you explore your options for responding to the IRS, challenging fines, and streamlining your overall tax planning.
How Do I Complete Form 5471?
There are several steps involved in completing and successfully filing Form 5471––here’s what you need to know.
1. Check Your Filing Requirements
First, double-check that you actually need to file a Form 5471. So, for example, chances are you’re filing a Form 5471 if you control at least 10% of a foreign corporation, or you controlled a foreign corporation during the tax year.
2. Gather Documentation
Next, gather the documents you might need to accurately complete your return. This will include records such as:
- Balance sheets
- Company ownership details
- Income statements
- Financial transaction records
The more information you have handy while completing your Form 5471, the easier the process will be.
3. Know Your IRS Form 5471 Category
With five filer categories to choose from, your next step is picking the right category. This is a key step because, depending on your category, you’ll have different schedules to complete.
And remember, you could fall into multiple categories, especially if you’re a shareholder and a director, or you acquire more stock during the tax year. So, select any categories which apply.
4. Complete the Right Schedules
Next, it’s crucial to complete the right schedules as determined by your filing category. So, for example, you may need to complete schedules such as the balance sheet (Schedule F), income statement (Schedule C), or current earnings and profits (Schedule H).
If you don’t complete the required schedules, you could face issues such as tax penalties, auditing, or a loss of foreign tax credits. So if you’re unsure which schedules to complete, let the Gordon Law team help!
5. Attach Form 5471 to Your Tax Return
The final step is to attach the completed form to your individual or corporate tax return. This means that individuals should attach the form to their Form 1040, while a business should attach it to their entity return or Form 1120.
Once you’ve completed the above steps, and you’re happy that the form is accurate, you can go ahead and file it with your individual or entity tax return.
Do I Need an Attorney to File IRS Form 5471?
No, there’s no requirement to have an attorney file Form 5471 on your behalf. That said, there’s no shortage of reasons why you might benefit from having an attorney on your side.
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- Complexity: Foreign tax returns are inherently complicated, and it’s easy to make mistakes or oversights. However, a tax attorney can help you avoid these issues and give you the knowledge you need to submit your return with confidence.
- Support: Whether you have questions about completing Form 5471 or how to manage your tax issues more generally, an experienced tax lawyer is on hand to give you the support you need.
- Convenience: let’s be honest––tax returns are time-consuming. But a tax attorney reduces the stress by handling the most complex steps for you.
- Guidance: Depending on your circumstances, you may be required to submit additional forms alongside Form 5471. An attorney will ensure you know which forms are relevant and how to complete them.
Trusting the attorneys at Gordon Law to help you complete and file IRS Form 5471 means that you can spend more time focusing on your foreign investments and commercial goals—and less time stressing over tax returns.
Need Help Completing an IRS Form 5471? Contact Gordon Law Today!
Whether you’re a new shareholder or a seasoned director, there’s no doubt that Form 5471 is one of the trickier IRS forms to understand. But don’t worry––this is where the Gordon Law team can help. Our experienced attorneys will walk you through the entire filing process, helping you to not only avoid tax penalties, but to reduce your overall liability where possible. So if you’re looking for information on how to file Form 5471, or you need help responding to the IRS, give our friendly tax professionals a call or request a consultation online.
