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Who is required to File Form 5471? Certain US persons who are shareholders (Corporate, Individual, Estates and Trusts shareholders), officers or directors of a foreign corporation may be required to file Form 5471 on an annual basis. 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. What Information is Required? The required information starts by listing the identity of the US shareholder and details about the foreign corporation. It must also include data on transactions between you and the foreign corporation, original capital contributions and other relevant data. It is 4 pages long. Several other schedules are required, which can make it a total of 6-7 pages. Among the schedules to be filled is the balance sheet for the corporation and income and expense sheet for the current year of operation, in accordance with US GAAP . Depending on which of the five categories apply to the taxpayer (in fact, there are four categories because category one has just been repealed), different schedules must be completed. An officer or director of a CFC who is not an owner of the CFC will be required to file under category 2 where certain U.S. persons have acquired additional stock in the corporation. A category 2 filer is only required to complete page one and schedule G. Where a U.S. corporation is the 100% owner of a foreign corporation that is not a Foreign Personal Holding Company (FPHC), the filer could be classified as a category 3, 4 or 5. Quite often, more than one category can be applied to one filer - all that applies must be checked and required…Schedules for each category filed. When is Form 5471 Due? Form 5471 is due with the income tax return of the affected shareholder. For corporations, that would March 15th or the extended due date. For 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. IRS estimates that the average time required for record keeping preparing the form is 82.5 hours and that the average time required for learning about the form is 16 hours, and that does not include the separate time estimates for schedules J, M, N and O. To File or not to File? is not a choice. 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. 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.
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