Whether you own an interest in a foreign corporation, partnership or foreign financial account, it is likely that the IRS wants you to supply information on the investment.  US officers or directors of foreign corporations (and constructive owners) may also have filing obligations.  Two of the most longstanding filings, Form 5471 and TD  F 90-22.1, continue to be important tools for the government. 

Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations) has been required for over 25 years.  It presents a comprehensive US tax picture of a foreign subsidiary with US owners.  The IRS relies on this return to help identify audit targets and manage examinations.  Significant penalties, including loss of foreign tax credits and waiver of statutes of limitation, can result from overlooked or incomplete filings. 

Penalty notices were sent because, for among other things, filers did not include correct basic information about a foreign subsidiary.  Perhaps the most overlooked filing is by US officers and directors of foreign corporations with ownership changes who may incorrectly assume that US corporate shareholders will file on their behalf. 

What does the IRS look at when they review Form 5471?

• Is information presented consistently year to year?
• Are creditable foreign taxes and earnings and profits being calculated?
• Does it appear that 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?

Over the years, the IRS has invested significant effort to develop the various schedules to highlight important tax issues that should not be overlooked.

US persons have been required to disclose financial interests or signature authority over foreign accounts with values over $10,000 on income tax returns and by filing TD F 90-22.1 for over 30 years.  The IRS, which assumed enforcement responsibility for this form, has estimated several years ago that less than 20 percent of the reports required have been filed.  Historically, enforcement actions were rare, despite severe civil and criminal penalties for willful behavior. 

Owners of jointly held accounts, accounts of 50-percent owned foreign companies deemed controlled by US persons, and US individuals that have actual signature authority over a foreign account in connection with their US employment frequently overlook this report.  The 2004 tax act added a $10,000 civil penalty for non-willful failures to comply.

For more information, please contact:
Bill Leary
Director, International Tax
tel: (713)353-8125