Certain US persons who are shareholders, officers or directors owning or controlling 10% or more of a foreign corporation are required to file this and related forms. US Persons include US citizens and residents, US corporations, partnerships, estates and trusts. Ownership and control aggregates not only direct/personal relationships to the corporation, but indirect ones via certain family members or related corporations as well. The term foreign corporation includes international business companies that have US shareholders, foreign limited liability companies (LLCs) and stock companies.

Form 5471 is similar in scope to a corporate tax return or partnership information return. One of the significant differences here is that certain income of a foreign corporation controlled by Americans can be taxed to American shareholders. Information required ranges from simple identification information to detailed US GAAP financial statements and related party transaction reporting - depending on the categories of the filers.

Categories of US persons subject to filing this form are (taken from the instructions to form 5471)

• A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
• A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
• A US person who had control of a foreign corporation for at least 30 days during the tax year.
• A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.

Form 5471 is filed as a schedule to the shareholder’s income tax return by the due date of that taxpayer’s return (1040, 1120, 990, 1065) including extensions. Thus, most corporations would file by 15 March, most individuals by 15 April (15 June or 15 October for most Americans filing from abroad).

The penalties for failing to file this form are draconian regardless of whether tax id due or not. Penalties begin at USD10,000 / year for failing to file and may increase by as much each month following an IRS notification to file. Criminal penalties (including imprisonment) may be imposed for willful evasion. Late filing may reduce the amount of connected foreign tax credits available to reduce US taxation.The IRS has often waived penalties on failure to file for reasonable cause. Recent actions by the IRS as late as August 2008 suggest that the IRS is becoming more aggressive in assessing penalties.

The comments in this article are not intended to constitute an opinion regarding any specific tax issues because additional tax issues may exist that could affect the tax treatment of the tax issues addressed in this memo. This memorandum does not consider or reach a conclusion with respect to those additional issues and was not written and cannot be used for the purpose of avoiding penalties under code section 6662(d). For more information, refer to the related U.S. tax code and IRS regulations at www.irs.gov.