Over the past several years, the IRS has mandated different types of information returns be filed to facilitate reporting of investments/financial interests in foreign entities. Form 5471 is one such information return to be filed by U.S. persons with respect to certain foreign corporations.
A few exceptions from filing are provided to prevent duplicate filing of the same information by different persons. Nonetheless, broadly speaking, Form 5471 is required to be filed in the following situations:
- U.S. person becomes a director or officer of a foreign corporation
- U.S. person acquires an ownership interest in a foreign corporation in excess of the prescribed limits
- U.S. person disposes of stock in a foreign corporation that reduces his or her interest in the foreign corporation to less than the prescribed limits
- U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year
- 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.
In determining the ownership interest, the complex rules of direct, indirect, and constructive ownership come in to play. One must not be under the impression that the filing is required only when a U.S. person directly buys or sells an interest in a foreign corporation.
A $10,000 penalty is imposed for each form per year for failure to furnish the form in a timely manner. Additional penalties of up to $50,000 are charged for instances of continued failure. A defaulting person is also subject to a reduction of 10% of the foreign taxes available for credit. Continued cases of failure are also subject to additional reductions. Failure to file or report certain specific transactions attracts a penalty of $10,000 per reportable transaction. Last but not least, criminal penalties may also apply for failure to file the requisite information.
If you are directly or indirectly involved in a foreign corporation in any of the ways discussed above, we advise you to check with your tax advisor to determine if you have any filing obligations.