If you have any ownership position in an offshore or foreign corporation it is important to understand your reporting responsibilities to the IRS. If you own 10% or more of any foreign corporation’s voting authority, you are required to accurately and transparently complete IRS Form 5471 and attach it to your federal return each year. The IRS Form 5471 carries heavy penalties and consequences for those who do not correctly comply with the IRS. Have you correctly completed and attached the IRS Form 5471 each year?
The IRS particularly monitors offshore reporting from banks, financial institutions and foreign sovereign tax authorities regarding US taxpayers who have any interest in a foreign corporation. It is also the responsibility of US taxpayers to provide information regarding other US taxpayers who hold a stake in a foreign corporation for which they hold any ownership interest. There are several ways in which the IRS can piece together your ownership position and track offshore corporate ownership back to you. The days of private information and secret offshore holdings are gone forever.
If you have more than 50% of the voting power in a foreign corporation the IRS considers it to be a “Controlled Foreign Corporation” or CFC. Once you obtain 10% or more of the voting power within a foreign corporation or CFC you are required to complete the IRS form 5471 and attach it to your return. The failure to accurately complete and file IRS form 5471 carries heavy penalties and consequences including the penalty of $10,000 per form per year, as well as separate penalties for any IRS Form 5471 which is late or inaccurate. The penalties will be applied even if the omission of this information results in no additional tax obligation. Many people misunderstand the regulations and think this only applies to CFCs or those who own more than a 50% interest. If you own 10% or more in any foreign corporation you should have filed an IRS form 5471 for each year from the date you obtained the 10% ownership position forward.
The failure to file the form 5471 suspends the usual statute of limitations of 3 years (6 if other irregularities or unique circumstances apply) and leaves you vulnerable to an audit for an indefinite period of time. This exposes the US taxpayer to be audited on the entire tax return for any year the form 5471 was omitted, incorrect or inaccurate. Unfortunately, the completion of the IRS form 5471 also results in a much higher risk of an IRS audit.
If you own any interest in an offshore or foreign corporation, especially a Controlled Foreign Corporation or CFC we invite you to contact the experienced international tax attorneys at Allen Barron in San Diego for a free consultation at 866-631-3470.
