Decoding Form 5471: Reporting Requirements, Penalty, and Relief for U.S. Shareholders of Controlled Foreign Corporations

Form 5471 is an informational reporting form required when a foreign corporation is owned greater than 50% by a US person(s), referred to as a controlled foreign corporation (CFC). It is a form used to collect financial data of the CFC and to determine items of foreign income for a US shareholder.  Besides corporations and partnerships, officers, directors, and individuals who are shareholders of CFCs must attach the form to their US returns. In this article, we’ll focus on the reporting of individuals.

Categories of Filers and Filing Requirements

There are five categories of filers for Form 5471. Each has varied reporting obligations. The Instructions for Form 5471 provide details for the various categories and a list of schedules required for each.

Here’s a summarized breakdown:

Category 1: Ownership of a Specified Foreign Corporation (SFC)

A Category 1 filer is a U.S. shareholder of a foreign corporation that was required to report transition tax and owns at least 10% of that corporation’s voting power or value  A foreign corporation may be an SFC while not being a CFC.

Example: John, a U.S. citizen, owns 15% of an SFC. He is required to file Form 5471.

Category 2: U.S. Officers or Directors of a CFC

A U.S. officer or director of a CFC must file if any U.S. person acquires at least 10% of the stock or increases their ownership by 10% or more in that CFC.

Example: Mary is a director when a U.S. shareholder acquires 10% of a foreign corporation’s stock. She must file Form 5471.

Category 3: Stock Acquisition or Disposition of a CFC

Any U.S. person acquiring or disposing of stock that brings their ownership to 10% or more, or reduces it below this threshold, must file.

Example: David sells 15% of his 20% ownership in a CFC, reducing his stake to 5%. He is required to file under this category.

Category 4: Control of a CFC

A U.S. person with control (more than 50% ownership) of a CFC at any time during a year in which the corporation is a CFC must file.

Example: Sarah controls 55% of a CFC’s voting stock for 10 days during a year. She must attach Form 5471.

Category 5: Ownership in a CFC

A U.S. person owning at least 10% of a CFC on the last day of a tax year in which an entity is a CFC must file.

Example: James owns 12% of a CFC on the last day of its tax year. He must file Form 5471

Penalties for Noncompliance

Failure to file Form 5471 can result in severe penalties. A $10,000 penalty can result in each annual accounting period of CFC. If after being notified, a U.S. person doesn’t provide the required information within 90 days, an additional penalty of $10,000 for every 30 days (or portion thereof) that the failure continues past the 90-day deadline. This additional penalty is capped at $50,000 for each violation.

Relief Options for Late Filers

If a taxpayer discovers that they have missed filing Form 5471, they may seek relief by filing the form before it is detected by the IRS. Taxpayers might qualify for relief under the IRS’s First Time Abate (FTA) policy, which can eliminate penalties for those with a clean compliance history.

For more information, refer to the IRS guidance on Administrative Penalty Relief. Leveraging programs like the IRS’s Delinquent International Information Return Submission Procedures can further reduce exposure to penalties.

It is crucial for U.S. individuals involved with foreign corporations to understand the filing requirements for Form 5471. Whether they are a shareholder, director, or officer, submitting accurate and timely filed Form 5471s is important to avoid penalties.

If you need assistance navigating through these complex requirements, our Global Business Services team offers tailored solutions to help your clients comply and explore relief options for late filings.