IRS FORM 5471 FILING REQUIREMENTS WHEN A U.S. CITIZEN OR EXPATRIATE OWNS ALL OR PART OF A FOREIGN (OFFSHORE CORPORATION)

By Don D. Nelson, Attorney at Law, C.P.A.

When the IRS audits your tax return, and tries to collect taxes by disallowing deductions or tries to impose an obscure provision from the tax laws, you can often argue the facts  or the interpretation of the tax law.  But, when you fail to include a required tax form with your US income tax return, there is little left to argue about.  And if the tax law states that failure to file that Form, automatically subjects you to a penalty of $10,000, you are in serious trouble.   This is an IRS agent's  dream.  It's form 5471.

If you own more than 10% of the shares of a foreign corporation, you are required to file form 5471 each year with your income tax return.   That includes any Foreign corporation that operates your business or owns real property.  If  US citizens  own over 50% of a Foreign corporation and you are at least a 10% shareholder there is a good chance you should include your pro-rata share of the foreign corporation's income  in your US tax return.  

The instructions to Form 5471 state that it could take over 32 hours to complete this form.  The form requires that you supply the IRS with the corporation's income statement, balance sheet, and data on its loans, operations and other shareholders.  It also requires information on dividends and managerial payments made to shareholders, officers and directors.

The financial information must be presented using US accounting principles which differ from those used to produce Mexican financial statements.

If you have failed to file the Form, you can avoid the penalty by showing your failure to file was due to "reasonable cause."  The definition of this term is not clear unfortunately.

If you own part or all of a Foreign corporation, and have not filed  form 5471, you should start filing it immediately to avoid the $10,000 penalty.  Though in the past it has been difficult to secure ownership information on Foreign corporations, in the future it will become easier. The IRS is actively involved in securing more information of US citizens finances overseas, and will only increase its efforts in the future.  And, of course, there are many US-Foreign Country  tax treaties which do provide for complete cooperation between the two nations with respect to the exchange of tax information on citizens domiciled in each.