Foreign Corporation Form 5471 - File it or else

Form 5471 must be filed by those who own 10 percent or more of a foreign corporation.  It contains information on other US owners, an income statement and a balance sheet.  Failure to file it can cause the nonfiler (if caught) to incur a $10,000 penalty from the IRS.  You must file form 926 also in the initial year to report your capital contribution to the foreign corporation.

If your foreign corporation is inacive and has less than $100,000 in assets and little if any income you may be eligible to file just page one of form 5471. Read more about the filing requirements and special rules that apply if you have failed to file this form at www.taxmeless.com. Email us with questions at ddnelson@gmail.com . We are attorneys and CPAs with the expertise you need.

IRS COLLECTING PENALTIES FOR LATE FILED FORMS 5471- INFORMATION REPORTS ON FOREIGN CORPORATIONS

Read more in article from Accounting Today. http://www.accountingtoday.com/news/IRS-Gets-Better-Assessing-Penalties-Late-Reporting-Foreign-Corporations-68888-1.html

IRS, Australia and United Kingdom Engaged in Cooperative Effort to Combat Offshore Tax Evasion

The tax administrations from the United States, Australia and the United Kingdom announced today a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in jurisdictions throughout the world. This trend is fast spreading around the world and in a few years will be the rule in a large number of other countries.

The three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.

The IRS, Australian Tax Office and HM Revenue & Customs have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions. Thus, they have developed a plan for sharing the data, as well as their preliminary analysis, if requested by those other tax administrations.

“This is part of a wider effort by the IRS and other tax administrations to pursue international tax evasion,” said IRS Acting Commissioner Steven T. Miller. "Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes.”

There is nothing illegal about holding assets through offshore entities; however, such offshore arrangements are often used to avoid or evade tax liabilities on income represented by the principal or on the income generated by the underlying assets. In addition, advisors may be subject to civil penalties or criminal prosecution for promoting such arrangements as a means to avoid or evade tax liability or circumvent information reporting requirements.

It is expected that this multilateral cooperation and coordinated effort will allow many countries to efficiently process this information and effectively enforce any laws that may have been broken.  Increasingly, tax administrations are working together in this way to assist one another in identifying non-compliance with the tax laws.

U.S. taxpayers holding assets through offshore entities are encouraged to review their tax obligations with respect to these holdings, seek professional advice if necessary, and to participate in the IRS Offshore Voluntary Disclosure Program where appropriate.  Failure to do so may result in significant penalties and possibly criminal prosecution.

If you have a problem and need help, please email us at ddnelson@gmail.com .  We have helped hundreds of expat and domestic taxpayers come into compliance with the complex US tax reporting requirements.

IMPORTANT US INTERNATIONAL TAX FORM DUE DATES

• Form TDF 90-22.1 (FBAR FORM) where you report details of your foreign financial accounts, including bank accounts, stock brokerage accounts, pension plans, etc. is must be received by the IRS by 6/30/12. No extension can be granted. Penalty for filing late can be $10,000 or more.
• Expat tax returns (if you lived abroad on 4/17/12) are due on 6/15/12 for 2011. You can obtain a further extension by filing form 4868 prior to that date. This does not extend the due date of any taxes you owe which must have been paid by 4/17/12 to avoid late payment penalties and interest.
• Forms 5471 (foreign corporations), 8865 (foreign partnerships),  8858 (Disregarded Entity), and 8621 (Passive Foreign Investment Company- usually foreign mutual funds) are all due on the due date including extensions thereof of your personal tax return. Most of these forms provide for a possible $10,000 penalty for filing late.
• If you have not filed these forms for many years (and were required to file) now may be a good time to file all those past years forms because the 2012 Voluntary Offshore Disclosure Program is still in effect and sometimes under that program you may be able to file these forms late and secure reduced or no penalties at all!

If you have prepared these forms yourself and are not sure if you have done so correctly, we do offer a service where we review your self prepared forms and provide you with written comments and suggested corrections.  These forms can all be downloaded at www.irs.gov.

US Flow Through Tax Election for Your Foreign Corporation or LLC

You can make an election if you have a foreign corporation or LLC which may (depending on your individual  business circumstances) to treat that entity as a flow through entity for your US tax return. This means all profits and losses from the foreign entity flow through to you tax return. It also means you can offset any foreign taxes paid by the foreign entity against your US tax on that flow through income taking it as a foreign tax credit which will normally offset your US tax on that flow through income dollar for dollar. If the foreign tax rate is higher than your US tax rate, that will mean you will owe no US tax on that foreign entity's income on your US return.

Only certain foreign corporations or business organizations are eligible for the US flow through election. A list of the entities which are not eligible for this election are listed by country and included in the instructions for IRS Form 8832.  It is best to review this list and see what types of foreign entities will be eligible to make the flow through election if it would be beneficial to your US taxes prior to forming a foreign corporation or LLC.

You may have to talk with an International Tax Expert to determine if a flow through election will benefit your business plan.  It does avoid possibilities of double taxation (if you plan to distribute most of the income to yourself) and Controlled Foreign Corporation Subpart F rules as well as other potential US tax problems.  Most foreign attorneys and accountants who help you form your foreign business entity do not know these US tax rules.  It is often difficult after the fact to change the type of entity (depending on the foreign country in which it is formed) if you later discover that you do wish to have the income flow through to your US return.  We have helped well over a hundred expatriate business owners determining which type of foreign entity will be best for them under US tax law.

Form 8938 proposed instructions analyzed

Trusts and Estates Magazine has analyzed the proposed instructions to the 2011 Form 8938 for reporting foreign financial assets.  Read here.  The good news is if you have already filed forms 3520, 5471, 8865, 8621, 8891 , you just have to state so on the form 8938, and do not have to fill out the rest of the form.  The filing thresholds, penalties, statute of limitations, etc are set forth in this easy to read article.

Quiet or Silent Disclosure May Not be Best Way to Go With Respect to Foreign Financial Accounts, Foreign corps, trusts, and partnerships

Forbes Magazine Article Does not recommend that taxpayers try "silent or quiet" disclosure to reveal their offshore bank accounts, financial accounts, foreign corporations, foreign partnerships or foreign trusts. The IRS says they are looking for individuals who are attempting to file past special foreign asset reporting forms and will hit them with the maximum penalties and possible criminal prosecution. Click Here to Read Article.

The IRS has extended the deadline for entering the 2011 Voluntary Offshore Disclosure Program to 9/9/11 from the original deadline of 8/31/11.   This will avoid the possible huge penalties which can be incurred if a taxpayer attempts to silently or quietly disclose.

Will Canada Revenue Agency Help the IRS Collect the Penalties for Various Unfiled Foreign Reporting Forms?

Click here to visit the link to recent article in the Vancouver Sun about Canada Revenue Agency Opinion. on enforcing IRS penalties for not filing FBARS, Foreign corporation and partnership forms, etc. It appears they will not help the IRS collect such penalties if assessed.

US Tax Ramifications of Forming a Foreign Corporation to Do Business Abroad

There are significant consequences (on your US tax return) when you form a foreign corporation in a country outside of the USA to operate your business or make investments in any other country in the world. Most offshore accountants and attorneys do not know enough about US international taxation to advise you of the consequences which should be considered in advanced.  It is much harder to correct the US tax problems which WILL occur later if you do not do your US tax planning in advance.

You need to consider the following US IRS reporting and election consequences:

• Controlled foreign corporation rules
• Subpart F income possibilities
• Passive foreign investment company rules.
• Possible Flow Through Election for US tax purposes.
• Subpart F personal holding company rules
• The need to file FBAR forms to report foreign bank accounts
• Transfer Pricing
• Possible Tax on Transferring intangible property and tangible property to a foreign corporation

We can help you plan your foreign corporation structure to avoid unpleasant and possibly expensive consequences for failing to consider the rules set forth above.  Many of these items are difficult to deal with after you have already formed your foreign corporation.

Keep in mind their are also special rules which apply to foreign partnerships, foreign LLCs and foreign trusts which must also be considered.

General Electrics Zero Tax Bill Involves Utilization of Legal US Tax Code Provisions Available to Expats with their own Businesses Located Abroad

The New York Times has an excellent article describing how General Electric has managed to reduce its tax bill by legally locating its business in low tax countries and utilizing provisions of the US tax code that apply to Foreign Corporations.  If you have your own small to medium business abroad, you too can take advantage of this type of tax planning even though you are not as big as GE.  We can help.


As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

FOREIGN CORPORATION FORM 5471 NON-FILING OR LATE FILING

The IRS recently announced that starting in 2009 they will start imposing the $10,000 penalty onf corporations that file Form 5471 late or not at all. This form is required of anyone (US corporation, LLC, trust, individual or partnership) owning more than 10% of a foreign corporation. It usually includes a yearly income and expense statement and balance sheet and information on the corporation, its distributions, business, owners, etc. This form is due with the regular or extended due date of the owner's regular tax return and is attached to the regular tax return.

It appears a large number of US taxpayers operating businesses abroad (and often also living abroad) form a corporation to operate their small business, but never file this form due to lack of knowledge or neglect. Often attaching a written excuse to the form will abate the penalty but ater the end of 2008, it appears this might not be as successful as it has been.

It is entirely possible that in the future the IRS will extend the automatic penalty assessment to individuals who file Form 5471 late or fail to file it. Right now they often will waive that penalty if the taxpayer attaches a reasonable excuse.