IRS form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is one of the most complex forms in the U.S. Expat tax return package. The form has evolved significantly post-TCJA to accommodate the massive changes to the tax law. Global Intangible Low taxed income (GILTI) now flows from one of many schedules of 5471. Other important information related to foreign corporations is also tracked on this form, such as PTEP.
The hefty penalties attached to not filing, or filing substantially incomplete form 5471 make it even more important to get it right in the first place.
This article, along with others on this website, is for information purposes. Further, the article/post may not be updated post publishing. Readers must exercise extreme caution and consult their professional cross-border tax accountant for up-to-date information and advice specific to their tax situation.
In this post:
The W’s of Form 5471
While form 5471 is applicable to U.S. persons who are shareholders, officers, or directors of certain foreign corporations, we shall be using Canadian Corporations as a reference in this post.
Who must file form 5471?
Generally, if you are a shareholder, director, or officer of certain Canadian Corporations, you must file form 5471. Form 5471 distributes the filers into multiple categories.
Previously, there were five categories, however, in 2021, IRS expanded the categories and now there are 9 categories. These categories now include: 1a, 1b, 1c, 2, 3, 4, 5a, 5b, and 5c. Depending on your situation, you may fall into more than one category.
Some of the terms used in the instructions for 5471 filings are below:
- U.S. Person: A U.S. citizen, resident, U.S. domestic partnership, U.S. domestic corporation, trust, or estate.
- U.S. Shareholder: A U.S. person that holds 10% or more of the voting stock, or value of the stock, of a foreign corporation. Please pay attention to direct, indirect, or constructive ownership rules. You may be considered owning stock due to attribution rules, even if there is no direct or indirect ownership. Read more here: Ownership rules for Controlled Foreign Corporations of U.S. Persons in Canada
- Controlled Foreign Corporation (CFC): Any foreign (Canadian) corporation where U.S. shareholders own more than 50% of the voting stock or value of all outstanding stocks of a corporation. Again, pay attention, to direct, indirect, or constructive ownership previously mentioned.
- Sec 965 Specified Foreign Corporation (SFC): Section 965 SFC is a CFC or any foreign corporation having one or more U.S. domestic corporations as shareholders as defined in Section 965. If you are not aware of Section 965, please use the link in the categories detail to find more information.
For an accurate and complete filing of form 5471, it is critical to decide what categories apply to you. For a detailed list of categories of form 5471, please follow the link here.
Constructive ownership rules can often make unsuspecting U.S. persons responsible to file form 5471. Before you start having your bits of fun, please have a look at the exceptions. You may or may not have to attach a statement to your tax return depending on your situation.
For example, if you are a spouse of a U.S. person living in Canada and Canadian spouse (nonresident alien) owns a CCPC in Canada, the U.S. citizen have become a filer due to constructive ownership rules. If the U.S. spouse does not have any direct holding in that corporation, there might be an exception available. These exceptions are listed for each category. Make sure to first determine the correct categories of filers, and then start analyzing them one by one. It is very easy to make a mistake by reading exceptions in one category alone. More details on exceptions can be found here.
The U.S. Green Card Holders and 5471 Filing Requirement
U.S. Green Card holders are U.S. tax residents and must file form 5471 if applicable to them. In the year, when Canadian tax residents move to the U.S. while having Canadian corporations have a 5471 filing requirement within the same year as well. Some green card holders use the tie-breaker rules claiming U.S. tax non-residency and file 1040-NR in the U.S.
Keep in mind that Dual residents who do not use the treaty to take advantage of the U.S.-Canada tax treaty are required to file 5471. If using tie-breaker rules, IRS’s position is that information returns still need to be filed even if tie-breaker rules are used. You can use the treaty to exclude income but all the information returns must be filed unless specifically excepted.
When & Where to form 5471 filed?
Form 5471 is filed along with the U.S. federal tax return. Use the due date of the tax return as the due date for 5471 filing including extensions. The form can be electronically filed or paper mailed along with the tax return.
For U.S. persons living in Canada, please ensure that your tax return reaches IRS before the due date (including extensions). As opposed to USPS, Canada post’s postmarking is not considered timely filing. If you are mailing your tax return, please use Private Delivery Service (PDS) as explained on the IRS website, to get the date and proof of filing when your package is acknowledged by PDS.
Schedules of Form 5471
If you get past the determination of various categories as applicable to you, consult the below schedules list as applicable to you. If you fall into more than one category, typically common, please make a list of all the schedules below table.
Given the complexities of some of these schedules and their interplay with other reporting requirements, you are recommended to seek professional help. Always check the updated schedules list from the IRS website.
Schedules Table:5471
| Schedule Required | Category Filer | ||||||||
| la | lb | lc | 2 | 3 | 4 | 5a | 5b | 5c | |
| The identifying information on page 1 of Form 5471 above Schedule A | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| Schedule A: Stock of the Foreign Corporation | ✓ | ✓ | |||||||
| Schedule B (Shareholders of Foreign Corporation) , Part I (U.S. Shareholders of Foreign Corporation) | ✓ | ✓ | |||||||
| Schedule B, Part II (Direct Shareholders of Foreign Corporation) | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||
| Schedules C (Income Statement) and F (Balance Sheet) | ✓ | ✓ | |||||||
| Separate Schedule E (Income, War Profits, and Excess Profits Taxes Paid or Accrued) | ✓ | ✓1 | ✓2 | ✓ | ✓ | ✓1 | ✓2 | ||
| Schedule E-1 (Taxes Paid, Accrued, or Deemed Paid on Earnings and Profits (E&P) of Foreign Corporation) {included with separate Schedule E) | ✓ | ✓1 | ✓ | ✓ | ✓1 | ||||
| Schedule G (Other Information) | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Separate Schedule G-1 (Cost Sharing Arrangement) | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Separate Schedule H (Current Earnings and Profits) | ✓ | ✓ | |||||||
| Schedule I (Summary of Shareholder’s Income From Foreign Corporation) | ✓ | ✓ | ✓ | ||||||
| Separate Schedule I-1 (Information for Global Intangible Low-Taxed Income) | ✓ | ✓ | ✓ | ✓ | |||||
| Separate Schedule J (Accumulated Earnings & Profits (E&P) of Controlled Foreign Corporation) | ✓ | ✓ | ✓ | ||||||
| Separate Schedule M (Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons) | ✓ | ||||||||
| Separate Schedule O (Organization or Reorganization of Foreign Corporation, Acquisitions and Dispositions of its Stock) , Part I (To Be Completed by U.S. Officers and Directors ) | ✓ | ||||||||
| Separate Schedule O, Part II (To Be Completed by U.S. Shareholders ) | ✓ | ||||||||
| Separate Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations) | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
Separate Schedule Q (CFC Income by CFC Income Groups) | ✓ | ✓ | ✓ | ||||||
Separate Schedule R (Distributions From a Foreign Corporation) | ✓ | ✓ | |||||||
| 1. Schedules E and E-1 are required for an unrelated section 958(a) U.S. shareholder only if the filer claims deemed paid foreign income taxes of the foreign-controlled corporation under section 960 for the filer’s tax year. More information in Rev. Proc. 2019-40. | |||||||||
| 2. Related constructive U.S. shareholders only need to complete Schedule E. Rev. Proc. 2019-40 for more details. | |||||||||
A taxpayer must complete the requisite schedule of form 5471. A form 5471 without required schedules may be considered as substantially incomplete and still fetch penalties.
Schedule O may have different filing timelines as compared to 5471. It is possible that there is a schedule O filing requirement even though 5471 is due in next period!
Due to the complicated nature of Certain items such as Earnings and Profits (E&P), Previously taxed earnings and profits (PTEP), transactions with related parties, and their interaction with other reporting requirements, you should leave the preparation of 5471 to tax professionals.
Form 5471 Penalties for Non-Compliance
What are the penalties for not filing form 5471
Right from determining the correct filer categories to complex calculations of PTEP, form 5471 can become painfully complex! It is also easy to skip some schedules, make sure each and every schedule listed on the form is attached.
Many taxpayers simply skip the form for multiple reasons. Sometimes D-I-Y tax returns are due to software limitations or a lack of understanding of the tax law. Another increasingly common scenario (based on the volume of inquiries to our firm) is when a Canadian tax resident moves to the United States.
Sometimes green card holders do not file these forms for their Canadian corporations as they keep on relying on the information provided to them by their tax preparers in Canada. As soon as you become a U.S. tax resident, all foreign income and assets reporting rules are applicable to you.
The penalty starts at US$10,000! It is applied non-compliance per corporation and per accounting period. If form 5471 is filed but required schedules are missing, such as Schedule M or O, penalties are issued in that case as well.
If IRS has mailed a notice, and the non-compliance is not corrected additional penalties are applicable after 90 days starting from an additional US$10,000 per month up to US$50,000. There may be some criminal penalties under different sections of the code.
Form 5471 preparation is a time-intensive job, it is quite possible that you may not be able to produce years of form 5471 within 90 days of notice. So the penalties multiply quickly with the number of forms and number of months.
How to manage 5471 penalties and non-compliance?
If you receive an IRS penalty notice, there may be some possible relief somewhere, however, options to have such relief are really limited. What are the options if you have not received a penalty notice yet but you have become aware of non-compliance?
Correcting Non-Compliance before penalties are issued
Do not make silent disclosure!
If you have become aware of the fact that you needed to file 5471 and didn’t, do not rush to send in the forms! This can result in the generation of penalty notices. Discuss with a competent cross-border or International tax accountant or a tax lawyer, and put up a strategy in place. There may be options where you can waive or reduce the penalties.
Identify the scale of non-compliance
Seek professional help and determine the scale of non-compliance. If you missed the 5471 filings, chances are that there are some other missing forms and returns as well, for example, 926, FinCen 114 (FBAR), or form 8865! All those forms carry their own penalties.
Gather the financial statements of the foreign corporation, and identify the transactions between related parties, the foreign corporation, and you. A preliminary analysis can help in determining the scale of non-compliance involved.
Choose the right professionals to determine the best strategy
Given the high dollar value of penalties, it does not need an extra emphasis on the importance of choosing the right professionals. For example, at our firm, we first determine the scale of the non-compliance and list down missing returns and forms to propose a strategy. We, then, a reputable U.S. tax attorney for a legal opinion on the proposed strategy. . Depending on the situation, either a one-time legal opinion is enough or, if needed, we team up with the tax lawyer to execute the final plan.
Examine tax impacts on both sides of the border
Often U.S. Green card holders work with professionals on both sides of the border, i.e. the United States and Canada. There is a reasonable possibility that a strategy devised on one side of the border can create adverse tax consequences on the other side of the border. For example, a taxpayer who moved to the U.S. and has a green card keeps on filing 1040 in the U.S. and T1 in Canada since he lives in both countries. It may be too late that the taxpayer recognizes the U.S. filing requirements and income inclusion for having a CFC. Even if using streamlined offshore procedures, if there is income inclusion in the U.S., the tax consequences may not be favourable if the overall tax burden due to the conversion of a CCPC to an OPC in Canada is combined with the same.
It’s extremely important to work with a cross-border tax professional who understands the reporting requirements of both the U.S. and Canada.
Options to submit missing Form 5471
Delinquent International Information Return Submission Procedures:
If the taxpayer has identified missed filing, IRS has not contacted the taxpayer, and the taxpayer is not under IRS civil examination or criminal investigation, DIIRSP might be the solution. A reasonable-cause statement needs to be attached to the amended tax return. Taxpayers may still receive notices for penalties, they need to respond to those notices by resubmitting a reasonable-cause statement. A word of caution here: get the reasonable-cause statement drafted by some professional! Your understanding of reasonable cause may not be an acceptable reasonable cause by IRS.
Streamlined Filing Procedures:
There are two streamlined procedures; domestic and foreign. If you are living in the U.S., you are most likely going through Streamlined Domestic Offshore Procedures. In case you meet the number of days physically outside the United States, you may qualify for Streamlined Foreign Offshore Procedures. In the case of domestic procedures, taxpayers are subject to Title 26 miscellaneous offshore penalties whereas foreign procedures provide relief from these penalties.
If you are a U.S. citizen living in Canada, including accidental Americans who happen to be born in the U.S., most of the time streamlined foreign offshore procedures offer the best way to correct non-compliance. All you need to do is submit 6 years of FBARs, 3 years of completed tax returns along with all information returns, and submit a certification Form 14653. Where Sec 965 transition tax is applicable tax returns are required since 2017.
What to do if you receive a penalty notice from IRS?
If you are assessed form 5471 penalties, there can be a few possible solutions:
- First-time penalty abatement is not available unless very specific conditions as laid out in Internal Revenue Manual Sec 20.1.1.3.3.2.1
- Request Reasonable Cause Penalty Abatement. Reasonable cause as mentioned before depends on the facts of the situation and is decided on a case-by-case basis. Simply claiming reliance on a tax professional, even a CPA, may not be a reasonable cause if the tax professional does not specialize in International Tax. In short, if you are assessed with 5471 penalties, you must get reasonable cause drafted by a lawyer.
- The final option should be to retain a talented tax lawyer to fight this penalty off in court either using Section 6751 where the IRS did not follow the procedures or to litigate the matter.
Final Word
Due to the heavy penalties for non-compliance and interaction of 5471 with other reporting requirements, it has the potential to become a nightmare for an unsuspecting taxpayer.
At first, you should always be diligent in determining your tax reporting requirements. Ensure the information is available when needed to prepare international returns such as 5471. Plan ahead and get on the schedule well before the beginning of the tax season.
Maroof HS CPA Professional Corporation can help you with your cross-border income tax compliance. If you have been non-compliant for past years, we can help you determine the best course of action. If needed, we can also involve our trusted, tested, and trustworthy tax lawyer in the process, so that you can get the best possible solution with reasonable costs.
Get in touch with us and know it for yourself.
2 thoughts on “IRS form 5471: U.S. Persons with Canadian Corporations”
I am a U.S. citizen and I live in Calgary. I made a mistake and have setup two corporations in June 2023. My accountant also made a section 85 rollover to transfer my sole proprietorship to the corproation. I’m learning now that I have to file 5471 return. I used to do my taxes myself before and it was so easy to complete schedule C. I wanted to avoid paying high taxes in Canada but now I’m learning that I may not owe taxes to Canadian government but I will owe to the U.S. government as GILTI. Can I just close down my corporation as it never happened.
Dear Sumit,In your case, I’d recommend to seek an advice from a cross border tax accountant who specializes in form 5471. You can also request us using the contact us form. You have to first understand why did the accountant advise you to set up corporations. You mentioned two corporations? Was he trying to setup a HoldCo/OpCo structure for you? That will make the tax preparation even more complex and expensive for you. Based on your comment, I am assuming that you will keep on deferring taxes within the corporation, that’s why you believe you would not owe taxes to the govt. On the U.S. side this is correct that you will have income inclusion under IRC 951(a), or 951A. You must seek an advice. Regarding closing of the corps, you will still have 5471 filing in 2023 and 2024 at least.