by: Claudine Gindel 2017-12-12
Obviously, not filing a Form 5471 at all when required to do so can trigger a Form 5471 penalty. But also, any Form 5471 that is filed but that the IRS considers not “substantially complete" may result in Form 5471 penalties. In this article we will discuss what types of mistakes on a Form 5471 could lead to "substantially incomplete" penalties and what you can do to protect yourself from an IRS international audit team that admits it is hyper-aggressive when it comes to assessing Form 5471 penalties.
Per the IRS website:
"Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to satisfy the reporting requirements of IRC sections 6038 and 6046, and the related regulations."
What this means that if you are a shareholder of a controlled foreign corproation who owns more than 10% of the stock you have a Form 5471 filing obligation. This law started out as a requirement for US corporations had to file reports on its corporations controlled overseas. It has morphed into a requirement that says that a person who has who have a 10% interest in a controlled foreign corporation has to engage in time-consuming and incredible onerous compliance work. How onerous? When you start reviewing some of the things that you can be penalized for below, you begin understand how unbelievably complicated Form 5471 is. But first a word about what Form 5471 penalties are.
Typically, Form 5471 penalties are $10,000 per each form that is not filed or is not substantially complete. This penalties can increase up to $60,000 if the IRS asked for a correct Form 5471 and one is not provided timely, or at all. Here are some more details:
Aside form non-filing, Form 5471 penalties can be assessed for forms that are substantially incomplete. We will now turn our discusison as to the types of things the IRS considers substantially incomplete. Note: Form 5471 issues are litigated routinely. The IRS's position is not always what a court will agree with.
International Financial Reporting Standards (IFRS) is the accounting method that are used in 110 countries across the world. There are key differences between IFRS and the Generally Accepted Accounting Principles (GAAP) that is used in the United States and for IRS tax compliance. And yet even IFRS can vary country-to-country. Form 5471 must be filed out according to GAAP. This can require huge time to "translate" IFRS books into GAAP.
Multiple Form 5471s for the same entity may need to be filed depending on how many US shareholders of a CFC there are and their ownership percentage. Still Schedule M should be consistent among filers. Sometimes though, you don't know how a co-owner of shares filed. This is critical that you are all on the same page.
Oftentimes a review of Form 5471 will indicate that a Form 926 is required as well. IRS Form 926 is the “Filing Requirement for U. S. Transferors of Property to a Foreign Corporation." Transfers include, but are not limited to:
Other types of 5471 errors that could be consider substantially incomplete and thus lead to penalties ( this list is NOT exhaustive).:
If you think this list is rather absurd, hold on. There is one more important trigger. There is even a Form 5471 penalty for mistakenly over-reporting information!
So now you probably have a better idea of what makes completing an IRS Form 5471 so difficult. There are an incredibly amount of minefields.
In fact, we know from many "Big Four" employees we have interviewed for positions over the years that the Big Four firms want little to do with Form 5471s --- except for their largest corporate clients. Think about this: Certain IRS tax compliance is so difficult that the biggest public accounting firms in the world are incredibly reluctant to handle Form 5471 compliance. It is difficult to think of a larger indictment of our complicated tax code. They know full well what is needed and are saying "no thanks" more and more. Form 5471 is no place for rookies, or even the merely competent. It takes scarce human capital to get the job done correctly.
If you're concerned that you may have unfiled, incorrect, or misfiled IRS forms, including Form 5471, contact us. We have helped thousands of US taxpayers around the globe. Call us at 888-727-8796 or email firstname.lastname@example.org.
This article was last updated December 12, 2017