Everything Expats Need to Know About IRS Form 5471

Income diversification can help you draw financial resources from more than one source of income or revenue, put them toward savings, and have a safeguard in case of economic hardships. 

If your income diversification strategy includes foreign corporation ownership, you must know about Form 5471. Also known as “Information Return of US Persons With Respect to Certain Foreign Corporations,” Form 5471 aligns with the U.S. tax system of collecting taxes from its citizens wherever they are in the world.

In this infographic, you’ll learn the significance and requirements of filing Form 5471 as an entrepreneur, businessperson, or expat with an income stream outside the U.S.

What is Form 5471?

Form 5471, or “Information Return of U.S. Persons with Respect to Certain Foreign Corporations,” is a document that reports information about U.S. taxpayers with shares or interest in a foreign entity and their transactions. Such taxpayers must file this information return.

Unlike tax returns, Form 5471’s purpose is not focused on calculating taxable income and U.S. income tax liability.. Instead, Form 5471 allows the Internal Revenue Service (IRS) to have a complete record of U.S. citizens and residents with ownership in foreign corporations, such as shareholders, directors, or officers. This way, the IRS can prevent U.S. residents from using foreign assets to evade U.S. income tax.

Although similar to U.S. corporate income tax return Form 1120, Form 5471 is an information return that may have little impact on the amount of taxes you must pay. Should you fail to file the form, you will incur penalties.

Who Must File Form 5471?

Most U.S. expats are under the impression that the IRS only requires officers or directors of a foreign corporation to file Form 5471. However, that’s not the case. Form 5471’s filing requirement scope is much more extensive.

According to the IRS, all U.S. citizens, residents, corporations, partnerships, trusts, or estates fall under the U.S. person category. The filer categories include:

1. A U.S. person owning a Specified Foreign Corporation (SFC).
2. A U.S. person with an officer or director designation in a foreign corporation who holds 10% ownership or more of its stock.
3. An individual who became a U.S. citizen while owning 10% or more of a foreign corporation’s stock.
4. A U.S. person with control in a foreign corporation for at least 30 days.
5. A U.S. person with stock ownership in a controlled foreign corporation for at least 30 uninterrupted days until the last day of the tax year.

These filer categories are accessible on the IRS website, allowing you to choose the filing category with the applicable reporting and schedules.

Ownership can be direct, indirect, and constructive. The rules and conditions for these ownership types will also determine whether you should file Form 5471 or otherwise. 

For one, calculating ownership includes specific schedules. Tax schedules are IRS forms that you must prepare, in addition to your tax return, to estimate your tax dues based on your income or deductions. 

Tax schedules typically report income, charitable contributions, mortgage interest, etc. 

And if the IRS categorizes your foreign company as a corporation, you must consider the foreign company’s liability. Fortunately, the IRS allows foreign corporations to file under a “disregard entity” status within 75 days of establishing the company using Form 8832. Choosing to file for disregard entity status will enable you to avoid the annual filing of Form 5471.

Documents You Need When Filing Form 5471

There are certain documents that you need to file for Form 5471. These documents contain formation that would help the IRS understand the shares or interests in a foreign entity and their transactions. You need:

• Your foreign corporation’s year-end balance sheet
• Information regarding the corporation’s operations and loans
• A foreign income statement (USD)

4 Tips When Filing Form 5471

You can get ahead of this tax process and avoid improper or late filing of your foreign corporation’s information return. Here are some tips to help you navigate Form 5471 filing.

1. Get accustomed to the filing instructions

The IRS has specific instructions regarding filing Form 5471, which can be overwhelming for the everyday taxpayer. The instructions are so complex, especially when determining your filer category, that it might take you more than a day to complete all the information needed to file the information return. 

It’s best to familiarize yourself with the instructions before starting with your company’s information return to avoid missing essential steps or requirements or redoing the process.

2. Be aware of the deadlines

Avoid paying any late fees by keeping track of all filing deadlines. Tax Day for U.S. citizens usually falls on April 15 or the next working day following a weekend.

Fortunately, the IRS grants overseas U.S. citizens an automatic two-month extension to fulfill their tax duties. That means if you’re an expat working or living outside the United States, you can file Form 5471 until June 15. That’s the same deadline as your Form 1040 tax return.

If you still need more time, you can file for another extension until October of the tax year. However, note this data is a file time extension and not an extension time to pay.

3. Learn the possible penalties for late and non-filing

The IRS imposes hefty fees on erring filers, making it crucial to know the consequences.

If you are required by the IRS to file Form 5471 but fail to file the information return, you must pay $10,000. The revenue service will impose another $10,000 penalty if you still do not file within 90 days of the IRS’s notification. That additional penalty will apply every 30 days of continued failure to file.

The maximum penalty for not filing Form 5471 is $50,000 annually. However, the IRS may waive the penalties if the failure to file is due to reasonable cause.

4. Work with a tax professional

Again, filing Form 5471 can be an arduous process involving several factors. The IRS will require you to provide the corporation’s income statement, balance sheet, loan data, operations, and shareholders’ information. Dividends and managerial payments to directors, officers, and shareholders are also required information.

All these aspects may be too much for an everyday citizen to handle, so hiring a tax professional to file Form 5471 can be helpful. Tax preparation services like Tax Samaritan have the expertise to resolve your challenges regarding Form 5471 filing.

Forming Strategies to File Form 5471

U.S. expats looking to establish new revenue streams enjoy a multitude of options. However, new income opportunities pose added responsibilities, including filing the information return, Form 5471. 

If you need help in this area, Tax Samaritan offers the best-in-class service. Tax Samaritan has been assisting expats for over two decades. We aim to continue helping U.S. expats make well-informed tax planning and investment decisions to grow their wealth while staying compliant with the law.

We know all the intricate tax laws that apply to expats, and our mission is to ensure that you maximize their benefits. Contact us today to inquire about all Tax Samaritan services, and we’ll be more than happy to assist you.