Form 5471 Reporting Refresher and Updates

Justin Lynch
Published Date:
Mar 1, 2020

The Tax Cut and Jobs Act (TCJA), signed into law in December 2017, brought significant changes to U.S. international taxation. During the 2018 tax filing season, practitioners had to navigate the new reporting requirements of the deemed repatriation of offshore accumulated earnings and global intangible low-taxed income (GILTI), among other provisions. In addition to the new tax law and its accompanying forms, existing forms were modified—which added even more complexity to an already challenging reporting environment. 

The IRS had to work fast to implement the TCJA’s major changes, and guidance continues to be published as the tax community digests all the new changes. Many practitioners who were comfortable with U.S. international tax reporting before the reform have now expressed a level of discomfort assisting clients with the new law and related filing requirements. Though a detailed analysis of the TCJA ‘s international tax reform is well beyond the breadth of this article, it does provide a high-level look at one particular form—Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”—and its changes over the last two years.

Where A Potential Issue Arises

IRS Form 5471 is required to be filed by certain U.S. shareholders of foreign corporations. The filing requirement doesn’t just capture multinational corporations or businesses with complex international structures; many small businesses and individual taxpayers can unknowingly get caught in the reporting web. For example, a taxpayer who buys a property abroad and uses the local equivalent of a limited liability company to hold it could end up being a shareholder of a controlled foreign corporation, and thus required to file Form 5471 with their Form 1040. A similar result could apply to a small business owner who uses a foreign limited liability company for a small business venture abroad. An entity that is disregarded or not treated as a corporation abroad can be classified as a corporation under U.S. law.

Advisors outside the U.S. will give local structuring advice and may not be aware of a client’s U.S. tax status or U.S. reporting obligations. Non-U.S. persons who become U.S. tax residents while owning foreign assets in their home country can also face Form 5471 reporting, usually as an unpleasant surprise. The penalties for not filing can start at $10,000 for each form not filed or not substantially complete and can increase from there. The takeaway is that even taxpayers with relatively low net worth or income can have complicated U.S. international tax filing requirements.

The Case of Foreign Corporations

A U.S. shareholder that owns at least 10% of a controlled foreign corporation (CFC) by vote or value is required to file Form 5471 annually. A CFC is a foreign corporation that is owned more than 50% by U.S. shareholders. For this purpose, the definition of “U.S. shareholder” includes a U.S. person that owns 10% or more directly, indirectly, or constructively of a foreign corporation, as measured by vote or value. These definitions are similar to those in place before the TCJA, but the new law did reinstate downward attribution rules, which can pull in certain corporations that would not have been CFCs under the old law. 

Form 5471 has different filing categories based on the U.S. shareholder’s ownership status, transactions during the year, and relationship to the company and other shareholders. A new category of filer was added for U.S. shareholders of specified foreign corporations in order to identify entities subject to the transition tax under IRC section 965. The definition of a “specified foreign corporation” is more reaching than that of a CFC and includes foreign corporations that are not CFCs and have at least one 10% U.S. corporate shareholder. These category 1 filers continue to have a filing obligation on Form 5471, even though the IRC section 965 transition tax was a one-time tax.

Ripple Effects

Those familiar with Form 5471 prior to TCJA can attest to the expansive scope of the changes.  Even in its prior version, the form was one of the more challenging forms to complete for a U.S. person. The version released for the 2018 tax filing season, and modified again for the 2019 tax season, brings the reporting to a whole new level. Almost all of the schedules were revised and expanded. New schedules were also added to account for reporting due to changes in foreign tax credit reporting on a category-by-category basis and also to supplement information required on the new GILTI tax forms.

Form 5471 has practically doubled in size from its previous version. Schedule J, which tracks accumulated earnings and profits of CFCs, now has multiple columns to track buckets from before and after the law changes. The most recent instructions to Form 5471 were just revised in February 2020, and Part I of Schedule J has seven new columns, and those in the prior versions were rearranged. There are significant changes to other schedules, questions on the form, and overall presentation as well. 

Because the IRS continues to work on new regulations related to tax reform, additional changes could be forthcoming. Anyone who invested the time to get up to speed for the 2018 tax filing season will have their hands full yet again, working through the 2019 season. Plan to invest substantial time becoming familiar with the revisions—and be sure to connect with clients early in order to gather the necessary information to properly complete analysis and the required filings.

Justin Lynch
 is a manager in Withum’s Private Client Service group with over 15 years of experience advising international and domestic families on a wide range of U.S. income, gift and estate tax planning issues.  His experience includes individual income tax compliance and planning for U.S. citizens, residents, and nonresident aliens, including those with complex foreign investments.  He also specializes in U.S. income tax reporting for foreign trusts, U.S beneficiaries of foreign trusts and U.S. owners of foreign entities.

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