Mastering Form 5471 for Interests in Foreign Entities: Determining Ownership Share and Correct Filing Status WEDNESDAY, FEBRUARY 12, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection and phone line (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Respond to verification codes presented throughout the seminar . If you have not printed out the “Official Record of • Attendance”, please print it now . (see “Handouts” tab in “Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form . Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on the • program page along with the presentation materials. Instructions on how to return it are included on the form. • To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 (“star” zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.
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Mastering Form 5471 for Interests in Foreign Entities: Determining Ownership Share and Correct Filing Status Feb. 12, 2014 Bill Leary, Doereen Mayhew leary@doeren.com
Form 5471 Generally Although Form 5471 is an information return, accurate completion is • important. The basis for the Form is found in IRC §§ 6038 and 6046. The Form dates back to the early 80s, when it replaced several outdated information returns. Form 5471 is an important IRS tool for determining entities that need to be • audited and establishing an audit work plan. Most recently, we have seen Form 5471 being used in connection with transfer pricing reviews. • The Form is also useful in determining whether a foreign entity is generating subpart F income or has undergone a taxable restructuring or changes of ownership. The Form can also be used to alert the IRS of a possible IRC § 956 inclusion. • The current version of the form was revised in December 2012. New instructions were issued on December 2013. • The government estimates that recordkeeping burden for this form approaches 130 hours and preparation takes on average 27 hours. 5
Form 5471 Form 5471 Issues • Is information presented consistently year-to-year? • Are creditable foreign taxes and earnings and profits being calculated? Is currently taxable income, such as subpart F income and Sec. 956 investments in • U.S. property, being included in U.S. shareholder’s income and are amounts being computed accurately? • Does it appear that other income currently taxable to the foreign corporation’s shareholders is being overlooked? Do transactions between related parties raise transfer pricing issues? • Have stock sales or reorganizations been accounted for properly? • Does the tax return include all forms required to report on foreign operations? • Consider the questions included in Schedule G (Other Information) & the related “reminders” included in the Instructions to the Form. 6
Form 5471 Penalties Penalties for failure to file Form 5471 can be steep. A minimum $10,000 • penalty can be assessed for each form that is not filed. In addition, 10% or more of the filer’s FTC for the year can be eliminated. A penalty of $10,000 can be automatically assessed for each Form 5471 • that is filed after the due date of the income tax return, including extensions, and also for Forms that do not include complete and accurate information. In addition, the penalty can increase up to $50,000 per Form per year in the event of failure to comply after notice by the IRS. Penalties for incomplete or inaccurate Form 5471s will be controlled by • the examining agents reviewing these returns. Generally, taxpayers can file penalty abatement requests based on • reasonable cause 7
Form 5471 Penalties Section 6501(c)(8) can apply when information is required to be reported • under Sections 6038, 6038A, 6038B, 6046, 6046A or 6048 and is not made available. Failure to comply with these reporting rules can extend the statute of limitation related to information required to be disclosed under these reporting rules. 8
Form 5471 Points to Keep in Mind • A separate Form 5471 must be filed for each foreign corporation for each tax year of the foreign corporation ending during the shareholder’s tax year. • U.S. accounting methods apply, but Form 5471 is not a mechanism for accounting method elections. • Filing on behalf of a U.S. consolidated group is permissible. Filing on behalf of others may be possible. • U.S. translation rules apply. Specific rules apply to hyperinflationary currencies. E&P adjustments need to be considered. Virtually all foreign corporations require • adjustments to reconcile U.S. GAAP books to U.S. E&P 9
Form 5471 Points to Keep in Mind • Attachments – Required schedules should be completed on the form itself. Penalties can apply for non-compliance. Certain attachments are mandated by the instructions, e.g., for partnership investments, when shares are acquired or disposed of and when a Section 338 election is made (Form 8883). Category 3 Filers must also attach a separate statement on certain debt and subscribed shares. • U.S. individuals, partnerships, trusts, estates, and corporations can have filing obligations and some may apply to indirect owners as well. Special rules apply to captive insurance companies and dormant companies. • 10
Form 5471 Filing Categories A Category 2 Filer is a U.S. citizen or resident who is an officer or • director of a foreign corporation in which a U.S. person has acquired the requisite shares (10% vote or value) in one or more transactions. A Category 3 Filer is a U.S. person who acquires the requisite shares in the foreign corporation, a person who becomes a U.S. person while meeting the requisite ownership requirements, or a U.S. person that disposes of the requisite shares. For example a U.S. shareholder that directly or indirectly disposes of sufficient shares in the foreign corporation to fall below a 10% threshold is a Category 3 Filer. A Category 4 Filer is a U.S. person (and certain nonresident aliens) who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during the accounting period of the foreign corporation. (A Category 4 File can also be a Category 5 Filer.) 11
Form 5471 Filing Categories A Category 5 Filer is a “U.S. shareholder” that owns stock in a foreign • corporation that is a CFC for 30 days or more during any tax year of the foreign corporation and that owned that stock on the last day of the year. A “U.S. Shareholder” as defined in IRC § 951(b) is a 10% owner that • directly or indirectly or constructively owns a controlled foreign corporation. A Category 5 Filer can also be a Category 3 Filer in a year shares of a • CFC are sold or the company is reorganized or liquidated.) Category 4 & 5 Filers may be required to file Form 8858 (Information Return • of U.S. Persons With Respect to Certain Foreign Corporations) for disregarded entities. • Special rules apply to captive foreign insurance companies as Category 3 and 5 Filers under IRC § 953(c) rules. 12
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Form 5471 Filing Requirements 14
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