In recent years the IRS has become interested in identifying international transactions that may be subject to taxation in the United States. As part of the broad effort to ensure compliance, there are situations where U.S. residents, citizens and even non-resident aliens have filing responsibilities to the IRS. Specifically, the IRS is looking to uncover transactional information between certain U.S. citizens, residents and companies, and foreign corporations/subsidiaries and/or shareholders. The result is qualifying individual and corporate taxpayers are required to file an information return (IRS Form 5471 or 5472) with their federal income tax return. As tax season quickly approaches, Belfint, Lyons & Shuman wants clients, prospects, and others to be aware of their filing responsibilities to ensure compliance and to avoid large penalties. Below we have provided key information on these filing requirements.
IRS Form 5471
There are several situations when IRS Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) has to be filed by a U.S. person with their federal income tax return. Some examples of these include (this is not an all-inclusive list):
- U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (which can be an individual citizen or U.S. resident, a domestic partnership, a domestic corporation, or an estate or trust that is not foreign) has acquired:
- stock that meets the 10% ownership requirement, or
- an additional 10% of the outstanding stock
- A U.S. person (see above for who is included) who acquires stock and now meets the 10% ownership (or a foreign who already HAD the stock and BECAME a US person)
- A U.S. person (see above definition) who DISPOSES of stock to BELOW the 10% threshold
- A U.S. person (U.S. citizen, U.S. resident, a nonresident alien who is electing to be taxed as a resident, certain dual-status immigrants, a domestic partnership, a domestic corporation, or a domestic trust) who had CONTROL (more than 50% of stock, by vote or value) of a foreign corporation for an uninterrupted period of 30 days
It is important to note that when assessing ownership interest there are several rules that are taken into account. This may mean that just because a U.S. person did not directly buy an interest in a foreign corporation, they are not necessarily exempt from the filing requirements.
Penalty for Non-compliance
There is a $10,000 penalty for failing to submit the appropriate filing for EACH annual accounting period of EACH qualifying foreign corporation. If the proper forms have not been filed within 90 days after the IRS has mailed a notice of failure, an additional $10,000 penalty (per qualifying foreign corporation) will be assessed for each 30-day period (or fraction thereof) missed. The maximum additional penalty a taxpayer can incur is $50,000. It is important to note submitting a substantially incomplete Form 5471 is considered the same as not submitting the form at all and the proper penalty will be assessed. Finally, taxpayers are liable for criminal prosecution for filing false or fraudulent information.
IRS Form 5472
There are two specific situations where corporations need to submit IRS Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) with their federal income tax return. First, foreign-owned companies conducting business in the U.S. need to provide details on reportable transactions. Second, Form 5472 must be filed by any U.S. corporation where a non-U.S. shareholder owns 25% or more of the company stock and where a reportable transaction has occurred. It is essential to note that the filing requirement applies if 25% or more of the corporation stock is owned by a single non-U.S. shareholder. If 25% or more is owned by multiple non-U.S. shareholders then the filing requirement does not apply. A reportable transaction is defined as any exchange of money or property (rent, property sales, etc.) regardless of currency exchanged excluding dividend payments. An important point often overlooked is that a separate Form 5472 needs to be filed for each qualifying shareholder.
Penalty for Non-Compliance
The penalty for not submitting the Form 5472 with the corporate tax return is $10,000. In addition, submitting a substantially incomplete filing is considered the same as not submitting one and the proper penalty will be assessed. If the proper forms have not been filed within 90 days after the IRS has mailed a notice of failure, an additional $10,000 penalty will be assessed for each 30-day period (or fraction thereof) missed. Taxpayers are also liable for criminal prosecution for filing false or fraudulent information.
Unsure if you need to submit these filings? Determining whether you have a filing requirement is often complex and requires the assistance of an international tax professional. The filing deadline corresponds with your individual or corporate tax return and is quickly approaching. Don’t risk it! Get the advice of an international tax professional that can ensure you are in compliance and avoid the hefty fines. For additional information please contact Kathy Schultz, CPA, at 302.225.0600, or click here to email Kathy. In a consultation she can assess your situation and determine if you have a filing requirement for 2013.