News

Form 5471 – Who Needs to File?

U.S. citizens or residents who are officers, directors, or shareholders in certain foreign corporations may be required to file Form 5471.  While this seems like a straightforward form, Form 5471 is very important and presents a lot of information to the IRS that can indicate other penalties or tax.

Those who are required to file are split into 5 categories. Each taxpayer should carefully consider which category is applicable to them because the category of the taxpayer determines which schedules, statements, and other information must be completed.

  • Category 1 filers – U.S. shareholders of a Specified Foreign Corporation (“SFC”). An SFC is any foreign corporation where one or more domestic corporations is a U.S. shareholder or where U.S. shareholders own more than 50% of the stock of the corporation. Category 1 filers are divided into three subcategories depending on the amount of their stock ownership and whether it is owned directly, indirectly, or constructively.

 

  • Category 2 filers – Officers or directors of a foreign corporation where any U.S. person (not necessarily the officer or director) has acquired stock and now owns 10% or more of the foreign corporation or has acquired an additional 10% or more of the foreign corporation.

 

  • Category 3 filers – U.S. persons who acquire stock in a foreign corporation and now own 10% or more of the stock or dispose of stock in a foreign corporation to reduce their interest to less than 10%. It also applies when a shareholder becomes a U.S. person while owning 10% or more of the stock of the corporation, or when at least 10% of stock is acquired.

 

  • Category 4 filers – U.S. persons who had control of a foreign corporation during the annual accounting period of the foreign corporation. A person who controls a corporation which controls another corporation is treated as being in control of both.

 

  • Category 5 filers – U.S. shareholders of a Controlled Foreign Corporation (“CFC”). A CFC is a foreign corporation that has U.S. shareholders that own more than 50% of the stock of the corporation. Category 5 filers are divided into three subcategories depending on the amount of their stock ownership and whether it is owned directly, indirectly, or constructively. CFCs are also the type of foreign corporation that give rise to Subpart F analysis and things such as GILTI.

 

Categories 1 and 5 relate to “U.S. shareholders.” For these categories, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively) 10% or more of either the total voting power or value of the stock of a foreign corporation.  A “U.S. person” includes an individual that is a citizen, green card holder, or meets substantial presence.  Therefore, if a U.S. person doesn’t own at least 10% they are not counted towards this control test.

Control is defined to be greater than 50% of either vote or value.  Additionally, in some situations as mentioned above, the IRS considers stock owned indirectly or constructively as owned by the taxpayer. This means that a taxpayer not only needs to consider direct ownership but also ownership by family members or other businesses.

If a taxpayer is required to file Form 5471 and does not, it can be an expensive mistake. There is a potential $10,000 penalty for each failure to file. Additionally, if the IRS has sent a notice of the failure to file, there may be additional penalties if the notice is ignored up to $60,000 per year per form. If a U.S. person has any ownership in or is an officer or director of a foreign corporation, a full analysis should be completed to determine if they are required to file Form 5471.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

Latest Post

SAN FRANCISCO

870 Market St., Suite 588
San Francisco, CA 94102
415.765.1754

SAN DIEGO 

3465 Camino Del Rio South, Suite 400
San Diego, CA 92108
619.980.4476

IRVINE

4 Venture, Suite 320
Irvine, CA 92618
949.838.7807

TIJUANA

Centro Corporativo Dayco
Blvd. General Gustavo Salinas #11050
Suite 602, Col. Aviacion
22014 Tijuana, B.C., Mexico
+52 (664) 504 6415

Newsletter Signup

Stay updated on the latest tax laws.

This site is registered on wpml.org as a development site.