Who is required to File Form 5471?
Certain US persons who are shareholders (both corporate and individual shareholders), officers or directors of a foreign corporation may be required to file Form 5471 on an annual basis. Here, is a link to the IRS Website on filing requirements l.
There are four categories (including corporate shareholders) that may be required to file the form, as follows:
1. A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
2. A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
3. A US person who had control of a foreign corporation for at least 30 days.
4. A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.
What Information is Required?
The required information may be as minimal as the identification of the US shareholder and the name and address of the foreign corporation – or it may be as extensive as a comprehensive balance sheet and income statement converted from multiple foreign currencies into US dollars, including computations of cumulative earnings & profits and disclosure of related party transactions.
When is Form 5471 Due?
Form 5471 is due with the income tax return of the affected shareholder. For most corporations, that would March 15th or the extended due date. For most individuals, that would be April 15th or the extended due date.
How Long does it take to Prepare?
The IRS estimates the average time to prepare Form 5471 is approximately 38 hours, exclusive of record keeping time and the time required to learn about the relevant law and the instructions. The learning time could be much longer for someone who is not familiar with the pertinent sections of the tax law.
Harsh Penalties – A New Reality
For many years, it was extremely rare to get any IRS reply regarding a filing, even if the form was very late. The IRS has been warning in public statements that the Form 5471 penalties were coming and would be automatically assessed by the IRS computer. The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471.
Remember, very often, the information on this form does not result in any taxable income or tax due for the taxpayer. So, the $10,000 penalty is a “disclosure” penalty, unrelated to the actual tax consequences of the information provided on the Form 5471. The $10,000 penalty is real and is now being automatically assessed.
If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.
Why should a US Corporation with NOLs still be Concerned?
With the economic downturn, many US corporations have build-up significant net operating losses (NOLs). Thus, management may not be overly concerned about filing Form 5471, based on its belief that the company’s NOLS will shelter any potential exposure. However, because the failure to file Form 5471 results in a penalty (not a tax), NOLs do not any shelter this exposure.
Thus, the often unforeseen result is a FIN 48 liability and hit to the P&L for $10,000 for each unfiled Form 5471. For example, a US corporation with four foreign subsidiaries for which Forms 5471 have not been filed in the three most recent tax years would be required to accrue a $120,000 (a $10,000 penalty for each unfiled Form 5471 x 4 subsidiaries x 3 tax years) FIN 48 liability and current year P&L expense, which can be a huge P&L hit for company with no US taxable income.
Additionally, the three year statute of limitations with respect to the underlying tax income tax return (Form 1120, 1040, etc.) does not start running until Form 5471 is properly filed, as the return was not complete at the time it was originally submitted.