With the increasing trend in globalization, US nationals working with and holding stakes in foreign companies is a norm today. To maintain fair-trade practices globally and to prevent malpractices, the US Internal Revenue Service or the IRS has developed certain procedures. Form 5471 filing is one of them.
About Form 5471
IRS tax returns are of two types: tax returns and information returns. Tax returns involve monetary obligations while information returns do not. But incomplete information returns have an adverse effect on a filer’s tax returns. Both are required to be filed annually and are most often complementary to each other. They have to be filed by the set year ending date prescribed by the IRS. Form 5471 filing belongs to the information returns category. Here is a closer look.
What is IRS form 5471 and what it is used for?
The IRS keeps a close watch on all international financial engagements of US citizens and their dealings with overseas companies. The IRS form 5471 filing is an annual declaration that carries all the necessary information towards this end. This particular form is only an information return and not a regular tax return. This declaration as it is does not carry any financial obligations for the filer unless due for penalties.
Form 5471 filing is directed towards US citizens (resident and overseas) who are shareholders, officers, or directors in foreign corporations. This form has 4 pages with 7 different schedules and 7 further separate schedules. Filing form 5471 is a highly complex process and the IRS estimates 32-38 hours to complete one form. This is usually filed along with the regular 1040. Depending on the type of international transactions, filers might need to file additional forms related to these such as form 1118, form 2255, form 5472, form 8938, etc.
As quoted by the IRS, form 5471 filing is “used by certain US persons who are officers, directors, or shareholders in certain foreign corporations…” to report financial transactions as required by the international taxation laws. The IRS uses this form to keep a detailed record of all US citizens who own stakes in foreign companies, which in turn determines the companies that need to be audited or are subject to Subpart F income. Considering the complexity of the process and the meticulous nature of documenting transactions and keeping up with changing taxation laws, it is better to seek professional guidance or explore automated software like Eqvista that makes this process simple and easy for checking a company’s shareholders and ownership.
Who all need to file form 5471?
The IRS has directed five different types of form 5471 filers. We will discuss these in length in the next section. However, the basic guiding principle is that any entity (individual or organization) who own more than a 10% stake in a foreign company are required to file form 5471. The shareholding could either be in the form of the voting power or its worth in value.
Form 5471 filing requirements also mandate that any US citizenship holder being an officer or a director of a Controlled Foreign Corporation (CFC) with over a 50% stake in the company (voting power or value) also belong to this category, provided they have held the share ownership for a continuous period of at least 30 days in that particular financial year.
Form 5471 Instruction
As we see, form 5471 filing is quite an intricate process. A thorough understanding of it is paramount for filers and personnel dealing with the filing process. The first step in this is to understand the various categories of filers and identifying the one suited to the individual or the organization. A lapse in this step will set the entire process down the wrong path.
Category of Filers
Form 5471 instructions categorize filers into the following 5 sections. However, the information required to submit will depend on the nature of the filer i.e. individual or organization.
- Category 1: U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC.
- Category 2: U.S. citizen or resident who is an officer/director of a foreign corporation in which a U.S. person has acquired 10% stock ownership in the foreign corporation or acquired an additional 10% or more of the foreign corporation’s stock.
- Category 3: A category 3 filer is a U.S. person who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement concerning the foreign corporation.
- Category 4: A category 4 filer includes a U.S. person who had control (over 50% stock ownership of the voting power/value) of a foreign corporation during the annual accounting period of the foreign corporation.
- Category 5: U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC.
Determining the category of filer using Tax Form 5471 Online Tool
The language used by the IRS to determine the category of filers can be overwhelming at times. But it is crucial to identify the right category else the form 5471 filing runs the risk of being defaulted. To bridge this gap, our expert team at Eqvista has introduced an online form 5471 tool. This is a quick guide to determine form 5471 category filers. The user can key in some basic information and receive instant results.
Track your Foreign Corporation Shares on a Cap Table
The IRS mandates form 5472 filing for US citizens and organizations holding shares in foreign corporations as it wants to keep a close watch on these international shareholding activities. Thus it is in the best interest of the tax filer to document these activities properly to avoid misfiling and the subsequent penalties. An efficient way to do this is by maintaining a cap table using automated software such as Eqvista.
A cap table details the share ownership in a company. It provides a snapshot of exactly who owns how many shares and the effect of dilution on share prices. It also includes important documents regarding stock issuances, sales and transfers, the exercise of options, conversion of debt to equity, and cancellations. A cap table helps maintain all of these from the start of the company with the founders and tracks data throughout the funding rounds, granting stock options to employees, and share transfers. It includes details of all types of shares such as common shares, preference shares, options, warrants, convertible notes, etc.
Filing of form 5471
Form 5471 filing is usually done annually along with your federal income tax returns. The resource (individual/organization) entrusted with the responsibility of the filing process must have extensive knowledge about international tax laws, categorization of foreign income, foreign tax credits, previously tax income (PTI), accumulated earnings and profits, and the likes.
A tax filer must do thorough background research of the firm they are entrusting their filing responsibility. Since tax filing is not an ad-hoc process and requires building the file gradually throughout the year, the tax professional must be a knowledgeable resource capable of guiding their clients. However, despite working with a professional, every filer must have a basic working knowledge of the tax filing process to ensure timely returns.
How to file form 5471?
One of the basic form 5471 instructions to remember is that all information such as the share structure, income statements, balance sheets, E&P statements, possible loans, distributions, and dividends during the year must be presented in a format acceptable by the US GAAP. Generally speaking, foreign company financial statements are composed in a different format, such as IFRS. Thus careful conversion is essential.
Though most of the form 5471 filing requirements is handled by tax lawyers, here are some basic steps every filer must follow to ease the process and reduce consultant fees:
- Collect and document as much information as possible about the company and all its relevant equity-related transactions. It is important to have a system in place to record and track shares and also easily share the relevant details with the lawyers and accountants.
- Determine the “category of filer” and if any exception for form 5471 filing applies.
- Engage a qualified tax professional.
- Based on the category of filing, identify the supporting tax returns to be filed and ensure the tax professional is in sync with these requirements.
- Ensure accurate and timely filing to avoid penalties.
Form 5471 Penalties
The IRS is quite stringent about form 5471 filing requirements. To minimize risks of fraud and in the spirit of inculcating good financial practices within countries in the global market, failure to file or lapse in filing tax returns of foreign companies is considered a serious offense.
Failure in proper filing leads to heavy penalties. The minimum fine is $10,000. This increases progressively every month by $10K. Penalties can sometimes go as high as $50,000. Beyond this, there are heavy chances of instigating criminal proceedings. All these measures are taken concerning the goals of the Organization for Economic Cooperation & Development (OECD) and Foreign Account Tax Compliance Act (FATCA). The common areas of mistakes are:
- Filer category
- Incomplete data sections
- Conditional information disclosure, expecting IRS to make special requests for data
- Missing financial statements
One must note that the failure to complete form 5471 filing keeps the filer’s entire federal tax file open and vulnerable to IRS investigation indefinitely until all information about foreign stock holdings is sufficiently disclosed.
Relief options for late filing of form 5471
Thankfully, the IRS has made provisions for incorrect filings. Taxpayers who have failed to file form 5471 filing for some reason may do so as per the IRS’s Delinquent International Information Return Submission Procedures. This is one way to avoid penalties under Sections 6038 provided the filer has originally filed the income tax return but left out some parts of form 5471.
However, form 5471 late filing penalty is sanctioned only in certain cases such as:
- A ‘reasonable cause’ for failure to file form 5471 must be demonstrated. The IRS has its guidelines to establish ‘reasonable cause’. More information is available on the IRS website.
- A filer must not be under any form of a civil or criminal investigation under IRS.
- Filer has not been contacted earlier by the IRS for the delinquent form 5471 filing.
Need any assistance in filing form 5471?
As is clear, a proper declaration of stock holding is the starting point of form 5471 filing. Eqvista’s sophisticated software provides an easy user interface for all shareholding needs, both for an individual as well as an organization. Our specially designed online form 5471 tool helps determine if the filer needs to submit form 5471 or qualifies for any exceptions. For further information contact our experts here.