Form 5471 – Information Return with Respect to Certain Foreign Corporations
Complex Reporting Just Became More Complex
By Chuck Gill, Director, Tax & Business Services
In December 2018, the IRS revised and expanded Form 5471, Information Return With Respect to Certain Foreign Corporations, both to require additional reporting and to encompass the compliance related to the new international tax provisions enacted as part of the Tax Cut and Jobs Act of 2017 (TCJA).
Although Form 5471 has been required for many years, it has gained significantly more importance as a result of the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 and the TCJA. It’s essentially an information return attached as a supplement to a U.S. “persons” (individual, corporation, partnership, trust, and estate) tax return filing requirement in the U.S. (Form 1040, 1065, 1120, et. al.). Its disclosures can become enhanced based on meeting some or all of the required filer categories. If you are a U.S. person with a 10% or more ownership in a foreign corporation, the IRS wants to know about it.
The reporting requirements have been expanded, making the disclosures more complex. The new form has expanded from eight to 16 pages, and there have been substantial changes to the schedules. Most new disclosures are a result of the TCJA international tax requirements that now require the breaking out of previously reported aggregated numbers, such as the Earnings & Profit components on schedule J, for example. These requirements will result in additional information-gathering for taxpayers that have not previously kept this detail.
Highlights of the new expanded disclosures include:
- New category 1 filer (previously repealed) now used for U.S. shareholders of specified foreign corporations subject to the provisions of the transition tax under Section 965.
- Expansion of Part B to determine information about direct shareholders of the foreign corporation. This is expanded to include, in some instances, indirect ownership and ownership by a foreign disregarded entity.
- Schedule C, the income statement has added lines to capture foreign currency gains and losses, both realized and unrealized.
- Schedule G – Other information has expanded from eight questions to 19, which include base erosion payments, intangibles, reorganizations, and information on foreign taxes, among others. Dollar amounts need to be disclosed.
- Schedule I – Contains new information needed to compute the shareholder inclusion under the Global Intangible Low Taxed Income (GILTI) provisions.
- Schedule J – Doubled in length and requires new information.
- Additional penalties can reach $50,000 if filing requirements are not met within 90 days of an IRS notice.
- The IRS may also disallow any foreign tax credits available to be claimed, for failure to file.
- Additional penalties may be applicable under other code sections including criminal penalties, penalties imposed for undisclosed foreign financial asset understatements, and preparer penalties.
- If the form is not filed or the form is considered “not substantially complete,” the statute of limitations will not begin on the filed tax return.
Penalties for Non-compliance
The IRS wants to know what taxpayers are up to and if they fail to properly report or disclose, there are consequences. Form 5471 information is required for those businesses operating offshore. Failure to file, or filing an incomplete form, is subject to significant penalties which may include:
- A $10,000 penalty for each annual accounting period of the foreign corporation that was not filed.
Even a good faith effort could result in an incomplete return, resulting in a plethora of penalties as described above. Form 5471 is one of the most complex and complicated tax forms the IRS has ever created.
Businesses requiring this reporting should reach out to their Marcum tax advisor for guidance on adhering to the law.