American expats living abroad have plenty of career choices. Some of them prefer to work for an employer and have a steady paycheck. Others might venture and start their own businesses. Owning a foreign corporation (FC) is rewarding and challenging. Moreover, it is accompanied by additional US expat tax requirements. Americans living abroad might be required to file 5471 form with US expatriate tax returns. Form 5471 is an information return for U.S. persons with respect to certain controlled foreign corporations.
This is an email from one of our clients, American expats. “I am an American living in Brazil and have my own business. I filed US expatriate tax returns by using a local CPA. Recently I learned that I should to file 5471 form for a controlled foreign corporation. Do I have to file from 5471 with American tax return? What are form 5471 instructions and filing requirements?”
Key expatriate tax questions about Form 5471
What is a Controlled Foreign Corporation (CFC)?
A controlled foreign corporation is an entity in which U.S. shareholders own more than 50 percent, by vote or value, of the FC.
Who must file 5471 form ?
5471 form must be filed by certain U.S. persons. A U.S. person includes a US citizen or resident who is an officer, director or shareholder of certain FCs. Moreover, a US person might include a US partnership, corporation and estate or trust that is not a foreign estate or trust.
There are four categories of US expats that may be required to file 5471 form.
Category 2 – American expat who is an officer or director of a FC in which any US person owns or acquires 10% or more of the stock of the FC.
Category 3– An individual who becomes a US person while owning 10% or more of the stock of the controlled FC.
Category 4 – American expatriate who had control of a FC for at least 30 days.
Category 5 – US shareholder who owns stock in a FC that is a controlled FC for an uninterrupted period of at least 30 days and who owned that stock on the last day of that year.
It is essential to determine a category of filer because 5471 form includes multiple Schedules that are applicable to different categories of filers.
The following schedules are a part of 5471 form:
– Schedule A – Classes of stock
– Schedule B – Shareholder information
– Schedule C – Income Statement
– Schedule E – Income and Other Taxes
– Schedule F – Balance Sheet
– Schedule G – Other Information
– Schedule H – Current Earning and Profits
– Schedule I – Summary of Shareholder Income
– Schedule J – Accumulated Earnings and Profits
– Schedule M – Transaction between Controlled FC and Shareholders
– Schedule N – Return of Officers, Directors and 10% Shareholders
– Schedule O – Organization or Reorganization of FC
How does 5471 form affect US Expatriate Tax Returns?
A foreign corporation has US-source income. In this scenario a controlled foreign corporation might be subject to US taxes like a domestic corporation. Additionally, the IRS has identified Subpart F income of controlled foreign corporation that is subject to US taxes whether it is distributed in a form of dividends or not.
When is form 5471 due?
The form has to be filed with US expatriate tax returns including extensions. The deadline for American expats living abroad is June 15. However, they can submit 5471 form by October 15 if they timely filed an extension form 4868.
What are the penalties for a failure to file 5471 form?
The penalty for a failure to file 5471 form with American tax return is $10,000. Moreover, if this form is not filed within 90 days since the IRS has sent a notice to US person, then the IRS will assess additional $10,000 penalty for each 30-day period. The maximum penalty is $50,000. Additionally, this person might be subject to a gradual reduction of foreign taxes available for credit under sections 901, 901 and 960.
How much time will it take to prepare 5471 form as a part of American tax return?
Per the IRS website it will take over 32 hours to complete the form. The IRS also requires the income statement and balance sheet that must be converted in USD from foreign currency per the GAAP. Another challenging aspect is to report any distributions on form 1040.
The IRS has stepped up efforts to find undisclosed offshore accounts of American expats. Moreover, the IRS works extensively with other countries through FATCA and information sharing agreements to find taxpayers who use foreign corporations and foreign trusts to hide money from the IRS. US expatriates are encouraged to step forward and become compliant to avoid potential high penalties and even criminal prosecution. American expats who need help with filing form 5471 and have questions about controlled foreign corporation must contact an expat tax CPA that provides international tax services. International tax experts at Artio Partners will be pleased to assist with 5471 form and other complex forms.