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Filing Requirements for Form 5471 - When a US Citizen Or Expatriate Owns All or Part of a Foreign Corporation

Failure to file Form 5471 automatically subjects you to a penalty of $10,000 - so this is a form that you should pay attention to if you're involved in business overseas.

If you own more than 10% of the shares of a foreign corporation, you are required to file form 5471 each year with your income tax return. That includes any Foreign corporation that operates your business or owns real property. If US citizens own over 50% of a Foreign corporation and you are at least a 10% shareholder there is a good chance you should include your pro-rata share of the foreign corporation's income in your US tax return. 

The form requires that you supply the IRS with the corporation's income statement, balance sheet, and data on its loans, operations and other shareholders. It also requires information on dividends and managerial payments made to shareholders, officers and directors. The instructions to Form 5471 state that it could take over 32 hours to complete this form.

The financial information must be presented using US accounting principles which may differ from the country the corporation operates in.

If you have failed to file the Form, you can avoid the penalty by showing your failure to file was due to "reasonable cause". The definition of this term is not clearly defined, unfortunately.

If you own part or all of a Foreign corporation, and have not filed  form 5471, you should start filing it immediately to avoid the $10,000 penalty.  Though in the past it has been difficult to secure ownership information on Foreign corporations, in the future it will become easier. The IRS is actively involved in securing more information on US citizens and their finances overseas, and will only increase its efforts in the future. Also, there are many US-Foreign Country tax treaties which do provide for complete cooperation between the two nations with respect to the exchange of tax information on citizens domiciled in each.