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Living abroad as a US expat is the adventure of a lifetime, especially when you’re able to live out your professional dreams of becoming an entrepreneur as well (Considering a move abroad? Read this article first.)
While this lifestyle typically affords you the flexibility you desire, it does bring with it certain 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.
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.
When it comes to who must file IRS Form 5471, many US expats are under the misconception that this form is only required for directors or officers of foreign corporations. Unfortunately, the scope of the filing requirement is much more extensive and is broad enough to include any US person who owns at least 10% of a foreign corporation.
The IRS has identified four different categories of US persons who are required to 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:
More information about the categories of filers can be found on the IRS website. Properly choosing the category is important 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 important to consider the liability of the foreign company when determining whether the foreign company will be considered a corporation. If the structure provides the owner(s) with limited or no liability, it will very 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.
It may seem simple when it comes to determining your company structure, but not so fast! Just because your resident country doesn’t label your business as a corporation, doesn’t mean it won’t be for US 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 to be a corporation. Though, certain foreign companies have the ability to elect “disregarded identity” status by filing Form 8832 within 75 days of the company’s creation in order to avoid the Form 5471 filing requirement. Click here to learn more about reporting requirements for different company structures.
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 in place to prevent a US citizen from setting up an offshore company simply to avoid US tax. Therefore, it’s very important to consider the type of income that the foreign company receives as well as 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.
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 important in order 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.
In recent years, the IRS has 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 their 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 on the failure to file this form.
For Form 5471 instructions, it’s usually best to work with a seasoned tax professional. You can also visit the official IRS website.
Our team of expert accountants has particular expertise in helping Americans abroad file their expat taxes with a hassle-free experience, including Form 5471.