What Form 5471 Is For
Form 5471 (2019) is used to report U.S. persons’ ownership or control in certain foreign corporations. It ensures compliance with U.S. tax laws that govern income generated by foreign entities. The Internal Revenue Service requires this filing form to disclose financial activity and ownership interest in controlled foreign corporations. It is an informational return, not a payment form, and helps track foreign financial assets, subpart F income, and other income from foreign subsidiaries during the corporation’s tax year.
When You’d Use Form 5471
You must file Form 5471 if you are a U.S. citizen, resident, or domestic corporation with an ownership interest, voting power, or control in a foreign corporation. It also applies to controlled foreign corporations and foreign partnerships. Filing is required by the due date of your income tax return, including extensions. If you miss the deadline, late filing penalties may apply, but the IRS may waive them for reasonable cause if you acted in good faith.
Key Rules or Details for 2019
- Filing Categories: The Internal Revenue Code outlines five categories of filers who are required to report on certain foreign corporations. Each category depends on the filer’s relationship to the foreign entity, voting stock ownership, or control during the tax year.
- Constructive Ownership Rules: You may be treated as owning stock indirectly through family members, partnerships, trusts, or other related parties. These constructive owners must also file the form promptly to avoid penalties.
- Controlled Foreign Corporation Definition: A controlled foreign corporation exists when U.S. shareholders own more than 50 percent of the total combined voting power or stock value of the foreign company during its annual accounting period.
- Subpart F and GILTI Income: U.S. shareholders must include their share of a CFC’s income groups, such as subpart F income or Global Intangible Low-Taxed Income, even if not distributed. Such income remains taxable under current tax laws.
- Foreign Tax Credit: Taxpayers may claim a foreign tax credit for foreign taxes paid or accrued to a foreign country, subject to specific tax regulations and reporting requirements.
- Jobs Act and Tax Cuts Impact: The 2017 Tax Cuts and Jobs Act introduced new reporting requirements for previously taxed earnings, cost-sharing arrangements, and base erosion payments associated with controlled foreign corporations.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Determine your filing category
Identify whether you qualify under Categories 1 through 5. Each category applies to different foreign individuals, such as officers, directors, or U.S. shareholders owning 10 percent or more of the corporation’s stock.
Step 2: Gather foreign financial data
Collect the corporation’s income statement, balance sheet, dividends received deduction details, and information on foreign taxes paid. Include fair market value data for foreign assets, owned stock, and voting stock during the foreign corporation’s tax year.
Step 3: Complete identifying information
Enter your name, the foreign corporation’s name, country of incorporation, functional currency, and ownership interest. Include information about related parties, direct ownership, and indirect ownership under constructive ownership rules.
Step 4: Complete applicable schedules
Each category of filer must complete specific schedules, including Schedule A for stock ownership, Schedule C for income generated, and Schedule F for the balance sheet. Some foreign entities also require Schedules J, M, and P for detailed reporting on previously taxed and passive income.
Step 5: Convert foreign currency
Convert amounts from the foreign country’s currency to U.S. dollars. Use the average exchange rate for income items and the year-end rate for balance sheet amounts to ensure consistent reporting for tax purposes.
Step 6: Attach to your income tax return
Attach the completed filing form and all required schedules to your income tax return. Individual taxpayers file it with Form 1040, while domestic corporations attach it to Form 1120. Always timely filing to meet reporting requirements under the Internal Revenue Service.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Filing incorrect schedules: Taxpayers often complete the wrong schedules or fail to include the required ones. To avoid this, carefully review which parts apply to your filing category before submitting Form 5471.
- Incomplete foreign data: Missing information about foreign subsidiaries or foreign partnerships can cause rejections. To prevent errors, verify all income statements and balance sheet data before filing.
- Incorrect currency conversion: Using inconsistent exchange rates leads to discrepancies. Avoid this issue by applying the average rate for income and the closing rate for asset values each tax year.
- Ignoring constructive ownership: Many filers overlook indirect ownership through related parties. Review the constructive ownership rules under Section 958 and consult with tax professionals to ensure compliance.
- Failing to report passive income or related transactions: Omitting such income or transactions with foreign individuals constitutes a violation of reporting requirements. Track all reportable transactions between U.S. shareholders and controlled foreign corporations.
- Filing late: Late filing penalties start at $10,000 per foreign corporation. Avoid them by filing promptly and requesting reasonable cause relief if delays occur.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
Once submitted, the Internal Revenue Service reviews the filing to verify compliance with international tax law. Form 5471 helps identify tax avoidance involving foreign entities and foreign financial assets. The IRS checks the proper reporting of foreign income, insurance income, and dividends. You may receive correspondence for missing data or corrections. Penalties apply for failure to file, but the IRS may waive them for reasonable cause. Continued ownership in a controlled foreign corporation requires ongoing yearly filings for each tax year to meet all tax obligations.
FAQs
Do I need to file Form 5471 (2019) for a foreign corporation with no income?
Yes, even if a foreign corporation earned no income during the tax year, U.S. shareholders must still file Form 5471 to report their ownership or control of certain foreign corporations.
How do I report controlled foreign corporations on my tax return?
U.S. shareholders report income generated by controlled foreign corporations, including subpart F income and GILTI, on their individual income tax returns in accordance with Internal Revenue Code rules.
Can I include foreign partnerships and disregarded entities on the same filing form?
No, each foreign partnership or disregarded entity must be reported separately if ownership meets filing thresholds under the IRS reporting requirements for foreign entities.
How do I record a foreign corporation’s balance sheet on Form 5471?
You must include the foreign corporation’s balance sheet, using U.S. dollar values, which should show assets, liabilities, and equity under fair market valuation at the end of the corporation’s tax year.
How does Form 5471 handle CFC income groups for tax purposes?
CFC income groups, including subpart F income and GILTI, are reported on Form 5471 schedules. These determine taxable income for U.S. shareholders under the Internal Revenue Code and tax code provisions.
What should I do if I fail to file Form 5471 promptly for a foreign corporation?
If you missed the filing deadline, submit the form immediately with an amended income tax return. You may request reasonable cause relief to reduce or remove late filing penalties.
