Tax Form 5471 : Information Return for Foreign Corporation 2023
Are you a US citizen with interests in foreign corporations? Then, it’s time to pay attention! The Tax Form 5471: Information Return for Foreign Corporation is back and more important than ever. As we enter the year 2023, this tax form remains a crucial requirement for those who own shares or have any kind of control over foreign businesses. In this blog post, we’ll discuss everything you need to know about Tax Form 5471 and how to ensure compliance with the IRS regulations.
The Ownership of the foreign corporations in case you are a US citizen requires you to file the tax form 5471. However, it is important to know how to file. Where to file and what are the requirements to do the same? But first, let us take a look into the details of what Tax Form 5471 is all about.
The Tax Form 5471: What you need to know
When you own a foreign corporation, you would be knowing that the experience is rather exciting and rewarding; nevertheless, this also accompanies additional tax requirements. Most ‘regulars’ in the tax requirements and their subsequent details know about the fact that this particular form is ‘complicated’ to say the least. So, let us take a look at the basics of the tax form 5471 requirements by answering a few basic questions.
Details About the Tax Form 5471
Essentially Tax form 5471 is an information statement or an Information Return, unlike the Tax Return. This applies to specific taxpayers who have an interest in specified foreign corporations. This tax form is officially termed as the Information Return of US persons concerning certain foreign corporations. Now, what is the main purpose of this form?
The main purpose of this form is not exactly to file the tax information but to ensure that IRS has a record of the US citizen and residents that have ownership in foreign corporations. In this case, the IRS wants to avoid people from concealing overseas assets and to take note of what is owned by various individuals and by which nationals. Form 5471 is much like Form 1120, which is a US corporation’s income tax return. Hence for this, quite a lot of details and information the disclosure is required. As this is essentially an information form, hence it does not make much of a difference about how much taxes you need to pay. Nevertheless, not paying the taxes on time, can still have you to face penalties for the same. Hence, this form is very much like the other tax forms; for instance, if you are a shareholder of a Controlled Foreign Corporation CFC, this form (5471) may affect your overall income in the form of GILTI tax- Global intangible low-taxed income.
In this case, the reporting requirements are much the same as everywhere else; and can be a simple percentage of the stock owned by the taxpayers along with the company information, for the sake of reporting the entire income of the corporation from the financial statements and balance sheets. Hence it is recommended that one takes the advice of a professional expert to assist you through the process and save you from having to pay the penalties.
Read More-: Tax Form 2555 for Foreign Earned Income Exclusion
The Tax Form 5471: Who Needs to File them?
This form can be filed by any corporation, US citizen, trust, Estate, or partnership that owns a minimum of 10% in the foreign corporation. In case you are still not sure if you need to file this or not you can check for the details on the official website or even a professional tax advisor. Also, our team at ‘Accountingadvice’ are more than happy to assist you as and when required.
The Controlled Foreign Corporation
This is a foreign corporation where the US shareholders own more than 50% of the stock ownership. According to the IRS, the foreign corporation is US controlled if:
“more than 50% of the total combined voting power of all classes of stock of the such corporation entitled to vote, or more than 50% of the value of all its outstanding stock, is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the foreign corporation’s tax year.”
In case this applies to you, then you might also have to pay GILTI taxes.
Difference between Form 5471 and Form 5472
The main difference between the two forms is that the US taxpayers file Form 5471 while Form 5472 is filed by foreign corporations who are engaged in any form of US business or trade. The same is applied to a US corporation which is 25% foreign-owned.
The Form 5471: The Schedules
- Form 5471 Schedule A – Foreign Corporation stocks
- Form 5471 Schedule B –The U.S. Shareholders of Foreign Corporations
- Form 5471 Schedule C – Income Statement
- Form 5471 Schedule E – War Profits, Income, and Excess Profits Taxes Paid or Accrued
- Form 5471 Schedule F – Balance Sheet
- Form 5471 Schedule G – Other miscellaneous information
- Form 5471 Schedule H – latest earnings and profits
- Form 5471 Schedule I – Summary of Shareholder’s Income from Foreign Corporation
- Form 5471 Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations
- Form 5471 Schedule M – Transactions between shareholders or other related persons and the controlled foreign corporation
- Form 5471 Schedule O – Organization or reorganization of a foreign corporation, and acquisitions and dispositions of its stock (Part I to be completed by U.S. officers and directors, Part II to be completed by U.S. shareholders)
Failing to File: The Fines and Penalties
In case an individual fails to file Tax Form 5471 due to a missing requirement or simply forgetting about it, you will be faced with a heavy penalty of $10000 for every accounting period of the foreign corporation. In case you receive a notice from the IRS and fail to file within 90 days, then the fine could go up to $60000.
Reporting the Subpart F Income
A specific subpart F income is usually included within the CFC’s revenue. This is that portion of income that might have to be recognised as a ‘dividend Distribution’ against the individual’s Tax return Form 1040 . Here are the four major components of the Subpart F income report:
- The Foreign-Based Company Sales Income: This is the income that is derived from the sales and purchase of personal property to (or form) a person related where the property has been manufactured and sold outside of the country of incorporation.
- The Foreign-Based Holding Company Income: This comprises the passive income which comprises interest, dividends, royalties, Annuities or rents.
- Insurance Income: This is the income that is generated after issuing any insurance or annuity contracts that are connected with the property in liability arising out of the activity in, or the health and lives of the residents of the country other than the nation in which the CFC has been organized or created.
- Foreign Based Company Service Income: This is the income derived from the performance of personal services through a CFC or both on behalf of an individual who is related outside of the country in which the CFC has been organized.
Here, one has to apply the ‘de minimus’ rule that allows all exclusion of all the gross foreign based company income and in case of insurance income which is less than the lesser of 5% of the gross income or $1 million. Also, a complete inclusion of all the CFC gross income as gross foreign-based organisation insurance and company income occurs in case 70% of the CFC’s gross income is gross foreign based insurance income or company income.
There are times when for an uninterrupted period of 30 days the foreign corporation is determined to be a CFC. This is determined each year. Here it is determined that the CFC has a subpart F income, where the US shareholder needs to include a deemed distribution included in their gross income. In case the US shareholder who is also the owner of the stock in the foreign corporation on the last day of the taxable year, during this time, the CFC treated corporation is considered to be receiving a deemed dividend from the CFC equal to the shareholder’s pro rata share of the subpart F income, which is computed as follows:
Pro rata share of subpart F income to U.S. shareholder = per cent of stock owned at year-end x Subpart F income x number of days the corporation was a CFC/total number of days in the year.
As required the deemed dividend is reported on the US shareholder’s entity return or individual return. Also, a copy of Form 5471 needs to be attached with the US tax return of the shareholder.
Tax Form 5471: The Filing Requirements
It is important to determine who needs to file Form 5471 and can be quite challenging all the same. Here are the requirements:
- Needs to acquire an ownership interest within a foreign corporation above the stated limit.
- Needs to ensure that the stocks are disposed of in a foreign corporation that lowers their interest in foreign corporations to lower than the stated limits.
- The individual is in control of the foreign corporation for an uninterrupted period of a minimum of 30 days for a year.
- The individual is a 10% or more shareholder within a foreign organization which is also a ‘controlled foreign corporation for a continuous period of 30 days in a year. The person should own the stock till the final day of the year.
- Reorganization or organization of the foreign corporation.
Here one needs to take note of the ownership interest where the complicated rules of indirect, direct and constructive ownership come into the picture. Also confusing is the category of the filers as these determine the 5471 schedules, information or statements, to be included as part of the new form 5471 filing.
Here the schedules are put to play to ensure that the reporting requirements of the transactions between the US person and the foreign corporation are according to sections 6038 and 6046 of the IRS code. The US taxpayers who are required to file 5471 can be subjected to the penalties that exist for such a case. The same is also applicable even if the corporation has conducted no business.
An individual who fails to file the taxes on time is subjected to penalties. Here the penalties can be quite steep, hence it is advisable to file on time. However, in case you fail to do so, you can face a penalty of $10000 or more for every year.
Likewise, an additional penalty of $50000 is also applicable in case of continued failure. Also, a reduction of 10% of the foreign taxes available for credit will be prescribed if the individual fails to file the form on time. A further 5% reduction is also issued for every 3 months or a fraction thereof, when the failure to file continues even after the 90 days has expired.
Finally, one must also be aware of the fact that form 1040 will be considered non-filed, hence leaving the return open for audit and penalties also.
Also Read-: Tax Form 8938 Reporting Requirements Explained 2023
Currently, the IRS is working overtime to keep track of the US citizen’s finances and assets owned overseas through FCTA and other platforms. Also, many US-Foreign Country taxes treaties have been put into action to exchange various tax-related information for the citizens domiciled in each. Hence, you must get honest and pay up your taxes on time.
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💠Frequently Asked Questions💠
What is the main purpose of Form 5471?
This form is an essential part of the disclosure for some US citizens and other residents who work as directors, officers, or shareholders for specific foreign corporations. According to the Form and the schedules specified, the reporting requirements of sections 6038 and 6046 and other regulations are put in place.
Who are the individuals that are required to File Form 5471?
All the individuals who are included within the ‘Category of Filers’ need to complete the schedules, information included and the statements accordingly. It is important to read the details of the category enlisted thoroughly to better understand the requirements for the people who need to fill out the form.
What are CFC Filing requirements?
CFC is a Controlled Foreign Corporation and comprises the rules that have been designed to limit the tax-escaping actions of certain individuals. These laws are applied only to those individuals who have an income from an entity that is not exactly taxable to the original owners
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