With globalization of markets, many US companies are starting to operate overseas through subsidiaries. Also, many US citizens are acquiring interest or participating in foreign corporations. If any of these scenarios seem familiar, then you should keep reading because you might be required to file Form 5741, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
WHO MUST FILE FORM 5471?
Form 5471 filing requirements shall be completed by a U.S person involved with a foreign corporation in various ways:
- Becomes a director or officer.
- Obtains ownership interest (prescribed limits), in control of the corporation for at least 30 days uninterrupted.
- Disposes stock to reduce interest (prescribed limits), controlled shareholder.
Ownership interest can be very difficult to determine. It is important to lay out every piece of information to determine ownership interest in the foreign corporation.
After assessing ownership interest and it is determined that a Form 5741 is necessary, it will be important to complete it according to the deadlines. Form 5741 will be attached to the personal income tax return and shall be completed by that same deadline. Failure to complete the form on time may put the filer at a risk of incurring penalties of $10,000 or more depending on continued failure.
Navigating Form 5741 for foreign owned corporations can be quite overwhelming to say the least. The Form is six pages long and has various filing requirements depending on each category filer. The descriptions of category filers and requirements of each are available on the instructions page of the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Filing Requirements for Categories of Filers
*Table chart from IRS instructions for filing requirements on Form 5471 (IRS.gov)
WHAT ARE THE PENALTIES FOR FAILURE TO FILE FORM 5471?
Penalties for failure to file the Form and information requested is $10,000 for each annual accounting period for not providing the information required by the time required. If the filer received a notice, they have 90 days after the notice to file. There is an additional $10,000 penalty for each 30-day period or fraction of if the filing was not completed after the 90-day period expired. The person filing must report all information required. If all the information is not reported, the filer may be subject to a reduction of 10% of the foreign taxes available for credit. The penalties can go on and on depending on the situation the filer is in. The penalty details are listed in the instructions form by section 6038 (a).
WHAT ARE MY CHANCES FOR AN INTERNATIONAL TAX AUDIT?
The area of international taxation is incredibly complex. It requires a detailed understanding of the laws of the countries involved in the transactions, as well as how various treaties impact the tax consequences of business operations.
The new global economy means that many businesses are engaging in foreign transactions and many families are impacted by cross-border tax consequences of financial dealings. This also has resulted in far more international tax audits than ever before as the Internal Revenue Service (IRS) has become much more active in reviewing international taxation matters.
Although the IRS always has monitored the international transactions of United States citizens, small businesses, corporations, and other entities that have foreign accounts, the number of audits arising out of international tax issues is on the rise. In addition, there are many pitfalls for those foreign nationals who are engaging in financial transactions that occur in whole or in part in the United States.
In the event of a tax audit involving international income, the determination of tax residency, foreign tax credits, the applicability of specific tax treaties, and other issues arising out of the source of income and the international tax consequences, it is imperative to have legal representation that understands all the nuances of international tax law and has international partners to assist in the logistics of an audit. At Brunoro Law, our skilled professionals are ready to help untangle the messy legal problems that may arise as part of an international tax audit. We offer a one hour free consultation in office or via telephone or video conferencing in order to learn about your international tax issues and offer possible solutions.