Form 5471: Filing Requirements with Your Expat Taxes

Form 5471: Filing Requirements with Your Expat Taxes

Living abroad as a US expat is the adventure of a lifetime, especially when you can live out your professional dreams of becoming an entrepreneur.

While this lifestyle typically affords you the flexibility you desire, it does bring specific expat tax requirements that you should be aware of. This article will highlight the top questions expats have about filing Form 5471, as an overseas business owner, alongside your US taxes.

Key Takeaways

  • The purpose of Form 5471 is to ensure that the IRS has access to the information it needs to enforce tax laws with respect to the varied activities of foreign entities and their owners.
  • Form 5471 is required when there is a foreign corporation controlled by US shareholders. But the definitions of control are not nearly as simply as owning more than 50% of a foreign corporation. 

What is Form 5471?

Officially known as Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations, this form is required along with your expat taxes for US citizens and resident aliens who are officers, directors, or shareholders in certain foreign corporations.

Who Must File Form 5471?

The filing requirement for IRS Form 5471 is much broader than many US expat taxpayers realize. Not everyone needs to include Form 5471 each year as part of their tax return – they might need to file it every few years or so. But most that need to file it do need to do so each year. Also, there are some people that may not be shareholders that need to file form 5471, including Officers and Directors of a foreign corporation that have US shareholders. And when a foreign person becomes a US citizen or Green Card holder, they often don’t know that they now have a Form 5471 reporting requirement if they own a foreign corporation. 

Who needs to file Form 5471, and how often do they need to file it? A comprehensive answer to that is too complex for this article, but we are going to give you the most common situations when it is required. 

  • Any US taxpayer that owns more than 50% of a foreign corporation needs to file a form 5471 annually. This includes US citizens, Green Card holders, and US based companies. 
  • If US taxpayers own 51% or more of a foreign corporation, then a Form 5471 is generally required annually. However, when making this determination, ignore any US taxpayer owning less than 10% of the foreign corporation. 
  • Family members that own shares in the foreign corporation may have to file a form 5471 because of the shares you own, and vice versa. 
  • Setting up other companies to own shares in the foreign corporation so that you do not have to file a form 5471 generally does not work. Any shares held by companies you own are generally deemed owned by you for purposes of filing form 5471. 
  • US citizens that are officers or directors of foreign corporations may have to file form 5471 if any US taxpayer’s ownership of the foreign corporation changes by 10% or more.  

More information about the categories of filers can be found on the IRS website. Correctly choosing the category is essential because Form 5471 schedules and reporting requirements vary by category.

Every expat should know these 25 things about US expat taxes. Find out for yourself.
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How Do I Determine My Company Structure?

Those familiar with US business terminology should not automatically assume that their foreign business is not a corporation if it is not labeled as such in their resident countries. The IRS has expanded the term “corporation” when deciding who must file Form 5471. 

It is crucial to consider the foreign company’s liability when determining whether it will be considered a corporation. If the structure provides the owner(s) with limited or no liability, it will likely be considered a corporation by IRS standards. However, some foreign companies have the option to elect “disregarded entity” status by filing Form 8832 within 75 days of the company’s formation to avoid the Form 5471 annual filing requirement. When filing form 8832 to avoid filing form 5471, it is important to know that other forms will instead be required, such as forms 8865 or 8858. Form 5471 is the most difficult IRS form, and being able to file these other forms can help simply your return. It is important to make sure the correct forms are filed to avoid penalties that start at $10,000 and can quickly increase. 

Click here to learn more about reporting requirements for different company structures.

Will Form 5471 Impact My US Tax Liability?

Possibly. Shareholders of a corporation are generally not taxed on the corporation’s profits. Shareholders are typically only taxed when they receive dividends or when they sell their shares. One legal common technique to reduce the amount of tax a shareholder owes is for the corporation to not pay out any dividends from its profits for a number of years. 

However, the IRS has many complex tax laws to prevent a US citizen from setting up an offshore company to avoid US tax. These rules may basically require the shareholder to include some or all of the corporation’s profits as their taxable income, even if they have not received a dividend. These “income inclusion” rules are commonly known as GILTI (guilty), Sub Part F, and effectively connected income (EFI). 

What is the Deadline?

If you meet the requirements above, you’ll need to file Form 5471 with your expat taxes. The US expatriate tax deadline is June 15th, as the IRS grants a two-month extension for those living abroad on Tax Day (April 18th). You may also request an additional extension until October 16th. Keeping track of the deadlines and filing on time is so essential to avoid penalties and interest, as you can receive a $10,000 fine for failing to file Form 5471!

The tax filing requirements for expat business owners can be quite tricky, so consulting with a tax professional is always a recommended step.

What Happens If I Don’t File Form 5471?

The IRS has recently been cracking down on US persons who fail to file US tax returns. In addition to failing to file an individual return, the IRS reserves the right to assess an additional penalty for failing to file Form 5471. For each year that this form is not filed, the IRS can assess a penalty of $10,000.

If the IRS has specifically requested the US person to file this form and the US person has not complied, the IRS can assess an additional $10,000 per month (after the first 90 days), up to a total of $50,000. The IRS describes the potential penalties and their assessments in more detail on its website.

The IRS normally has three years to audit you. But this is not the case with form 5471. The three-year status of limitations does not start until after you have filed Form 5471 when required. This means that for any year you have not filed a form 5471 when required, the IRS can go back and audit your entire tax return no matter how much time has passed.   

The IRS has put a lot of focus on US citizens living abroad who are not in compliance with their US expat tax filing obligations. They have recently entered into agreements with numerous foreign countries to exchange information regarding foreign activities, and noncompliance is more likely to be discovered.

If you believe you might be subject to Form 5471 filing requirements, it is recommended to become compliant sooner than later to avoid the potential $10,000 penalty for failing to file this form.

Can I File Form 5471 Myself? 

Yes, of course, you can. Instructions, forms, and schedules can be found on the IRS’s website.  

However, the IRS has a significantly higher standard when it comes to accurately completing this form, known as the Substantially Complete standard. Not meeting these standards could result in penalties. Given that Form 5471 is the most difficult IRS form to complete and that there have been numerous changes to it each year since 2018, it is recommended that only an experienced tax professional prepare Form 5471.  

An example of the form is seen below, but for specific Form 5471 instructions, it’s usually best to work with a seasoned tax professional like Greenback. You can also visit the official IRS website for more information. 

Form 5471

Need Help Filing Form 5471 for Your Foreign Business? We Can Help!

Our team of expert accountants has particular expertise in helping Americans abroad file their expat taxes with a hassle-free experience, including Form 5471.

Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.

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Whether you need tax advice to prepare for a move abroad, to buy property or even retire, Greenback can help. Consults upfront can help avoid costly mistakes and stress later.
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