Tax Question asked by Aiman Doe (Name changed at their request)
I am an American living in Canada since 2011. I own a Canadian Corporation since 2012. I have never filed 5471, mostly due to my ignorance. I have been thinking of filing all delinquent 5471 and keep on postponing it as the professional fee for streamlined procedures is very high. What if I don’t file, how will IRS collect its penalties if I don’t plan to ever go back to U.S.
Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers.
Form 5471 is Information Return of U.S. Persons With Respect To Certain Foreign Corporations.
Without going into details on filing requirements for form 5471, it appears that you may have already done your research on that. If not, you can take a quick look at a couple of related articles on our website.
You cannot escape the 5471 filing requirement
There may be more than filers of the same information!
When you have a Controlled foreign corporation (CFC) and you are a U.S. person, you must file form 5471. Since there are multiple filing categories for this form, it is usual for a filer to checkmark all applicable ones on a single form 5471. There are other situations where U.S. persons do not have direct or indirect control of a foreign corporation but still need to file 5471. For example, constructive ownership during the year of ownership can cause a category 3 filing requirement. Another example is the filing requirement for U.S. directors and officers of a foreign corporation as Category 2 filers when there are certain acquisitions or dispositions of the shares of stock of that corporation involving U.S. persons.
In short, not only the U.S. persons owning direct stock of a CFC have filing requirements as the attribution rules make the analysis slightly complex sometimes. Of course, there are some exceptions when certain conditions are met.
Coming back to your original question, bear in mind that if your spouse or children are U.S. persons, there is potential for reporting requirements at their end as well. So, I recommend conducting a detailed analysis.
How many 5471s need to be filed if late?
Technically, you need to file all the missing 5471s.
There is good news though, you can avoid penalties by using any of the below programs.
Caution: Please check the publishing date of this post as the information may be outdated at the time of user reading. Contact your Cross-border tax accountant in such a situation.
- If there is one missing form, you can explore the options available under first-time penalty abatement. You can find more information on the IRS’s website here.
- Submit all pending 5471 information returns using Delinquent International Information Return Submission Procedures. IRS’s website provides more information here. Since it requires a reasonable cause statement, watch for the related traps. What may seem to be a reasonable cause to you may not be the reasonable cause for this purpose!
- Submit the last three years completed 1040s along with all information returns including 5471s under Streamlined Foreign Offshore Procedures (SFOP). Since you have been living in Canada there is no penalty for you as opposed to those using domestic procedures. If there is Section 965 transition tax involved, you need to submit 5471s since 2017 (not the last three years).
Costs attached to 5471
5471 information returns are expensive, no doubt about that!
Per the Internal Revenue Service, it takes roughly around 38 hours to complete a 5471. It may not take that much time for a U.S. tax return preparer who regularly prepares these forms. It requires a lot of care so professional fees are applicable based on the time spent and the quality of the work.
Can the IRS collect penalties from Canadian tax residents?
Yes! Canada Revenue Agency does the collections for the IRS and they have done this in the past. If you think you would not visit the U.S. and you do not care about the IRS penalties can be very problematic for you in the future. Bear in mind, if the IRS requests you 5471 and you do not submit those, another layer of penalty gets involved. You will also lose your ability to use any relief procedures. Further, you can use SFOP only if your noncompliance was not intentional or willful but negligent. If you intentionally decide not to comply, you will have to seek relief on late filing through an offshore voluntary disclosure program (OVDP).
I also recommend you review some further information at a high level: