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.
- 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 must be filed by any person who owns or controls 10 percent or more of a foreign corporation, or by any person who owns or controls 25 percent or more of a foreign partnership capital interest (or profits interest).
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 considered to be 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. While the form is generally required for directors or officers of foreign corporations, any US person who owns at least 10% of a foreign corporation must file the form.
The IRS has identified four categories of US persons who must file Form 5471 with their US expat taxes each year. By their definition, a “US person” includes US citizens, partnerships, trusts, estates, and corporations. The four categories of filers are as follows:
- A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation,
- A person who becomes a US person while owning 10% or more of the stock of the foreign corporation,
- A US person who had control of a foreign corporation for at least 30 days, or
- A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of that year.
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.
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, with reporting purposes to include international business companies and foreign limited liability companies.
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.
How Do I Determine My Company Structure?
Determining the structure of your company can be confusing, but it’s important to know that just because your resident country does not label your business as a corporation does not mean it will be treated as such for US tax purposes. For the purpose of Form 5471, the IRS classifies international business companies and foreign limited liability companies (LLCs) as corporations.
Also, if the structure is set up, so the owners have limited or no liability, the IRS will likely consider it a corporation. Certain foreign companies can elect “disregarded identity” status by filing Form 8832 within 75 days of the company’s creation to avoid the Form 5471 filing requirement. Click here to learn more about reporting requirements for different company structures.
Will Form 5471 Impact My US Tax Liability?
Possibly. The most common situation involves US owners of foreign corporations being taxed on their dividends in the year of receipt and deferring any unpaid earnings and profits until they are distributed or until the company is liquidated.
However, the IRS has many complex tax laws to prevent a US citizen from setting up an offshore company to avoid US tax. Therefore, it’s very important to consider the type of income the foreign company receives and the source. The IRS has labeled several types of income as subpart F. Subpart F income will likely end up as taxable income to the US owner regardless of whether it was distributed as dividends. Furthermore, foreign corporations with US-sourced income will be subject to US taxes just as a US domestic company.
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 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.
Where Do I Find Form 5471 Instructions?
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.
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.