IRS Foreign Disclosure Requirements: Form 5471by kyoffelaw
Form 5471 is an information return that allows the IRS to tax foreign profits prior to their distribution as dividends (known as Subpart F income).
U.S. citizens, residents and entities such as LLCs, corporations, trusts, or partnerships (U.S. “persons”) serving as officers, shareholders or directors in certain foreign corporations may be required to file Form 5471 under the following circumstances:
1. A U.S. person becomes a director or officer of a foreign corporation
2. a U.S person acquires an ownership interest in a foreign corporation in excess of certain authorized limits
3. a U.S. person disposes of stock in a foreign corporation that reduces its interest in the foreign corporation to less than certain authorized limits
4. a U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year
5. a U.S. person is a 10% or more shareholder in a foreign corporation that is a ‘controlled foreign corporation’ for an uninterrupted period of at least 30 days in a year and that person owns that stock on the last day of the year. CFC is defined as a foreign corporation that has U.S. shareholders (counting only those with a 10 percent or more interest) that own on any day of the tax year of the foreign corporation more than 50% of the total combined voting power of all classes of its voting stock, or the total value of the stock of the corporation.
The rules governing determination of ownership interest are complex and include not only direct but also indirect and constructive ownership. 5471′s are required under circumstances beyond the direct purchase or sale of an interest in a foreign corporation by a U.S. person.
A $10,000 penalty is imposed for each form per year for failure to submit the form to the IRS. Additional penalties of up to $50,000 are charged for instances of continued failure. A U.S. person in default is also subject to a reduction of 10% of the foreign taxes available for credit. Additional reductions may be applied to cases in which a U.S. person continues to fail to file. A $10,000 penalty is applied in the event that a U.S. person fails to report certain types of specific transactions. Criminal penalties may also apply for failure to properly file the 5471.