IRS Initiates a Compliance Campaign for U.S. Persons with respect to Certain Foreign Corporations (Form 5471)

IRS Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations and must be attached to a covered Taxpayer’s Tax Return.  On April 16, 2019, IRS announced the approval of three additional Compliance Campaigns bringing the total of IRS Compliance Campaigns to fifty three (53).  IRS Compliance campaigns aim to improve return selection, identify issues that represent risk of Taxpayer non-compliance and make greater use of IRS limited resources.  Under the IRS practice area of withholding and international individual compliance, IRS announced a Compliance campaign focused on “Loosed Filed Forms 5471”.  According to IRS,  there are Taxpayers that are incorrectly filing Form 5471 by sending the Form to the IRS without attachment to a Tax Return. 

Who has to file IRS Form 5471?

Form 5471 has five (5) Category of Filers:

Category 1 Filer:   This category includes a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regulations under section 965. 

Category 2 Filer:  This category includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired (in one or more transactions):

• Stock which meets the 10% stock ownership requirement with respect to the foreign corporation or
• An additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.

Category 3 Filer:  This category includes:

• A U.S. person who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation.
• A person who is treated as a U.S. shareholder under section 953(c) (Foreign Captive Insurance Company Election) with respect to the foreign corporation.
• A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation.
• A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement.

Category 4 Filer: This category includes a U.S. person who had control of a foreign corporation during the annual accounting period of the foreign corporation. The definition of a U.S. person for purposes of Category 4 is a:

• A citizen or resident of the United States.
• A nonresident alien for whom an election is in effect under section 6013(g) to be treated as a resident of the United States (Section 6013 addresses joint returns of income tax by husband and wife).
• An individual for whom an election is in effect under section 6013(h), relating to nonresident aliens who become residents of the United States during the tax year and are married at the close of the tax year to a citizen or resident of the United States.
• A domestic partnership.
• A domestic corporation.
• An estate or trust that is not a foreign estate or trust.

Category 5 Filer:  This category includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC. U.S. shareholder. For purposes of Category 5, a U.S. shareholder is a U.S. person who:

• Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a CFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a CFC; or
• Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that also is a captive insurance company (Section 953 addresses Insurance income and Section 957 addresses Controlled foreign corporations; United States persons).

Don’t be a Victim of your Own Making

The Filing Requirements for Categories of Filers under Form 5471 are complex.  There is a minimum $10,000 penalty imposed for each annual accounting period of each foreign corporation for failure to furnish the information required.  In addition to the Form itself, there are additional Schedules that must accompany Form 5471 and the Taxpayer’s tax return.  If you are a U.S. Person who fits into any of the above listed Categories regarding a foreign corporation, consult a specialized tax advisor.