New Form 5471 – More Comprehensive, Burdensome and Time Consuming
By Mark Peltz
March 26, 2019
The Internal Revenue Service (IRS) has substantially revised Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations” to implement the Tax Cuts and Jobs Act (TCJA).
A number of the revisions will cause significant compliance burdens which will require additional time and resources to complete. Complicating the situation, many of the regulations which deal with the new international provisions have yet to be finalized. Accordingly, the form itself and many of the required calculations may still be subject to change.
First, a much greater amount of information is required. The form itself has doubled from eight to 16 pages and there have been substantial changes to the schedules.
The new Schedule C includes a section on other comprehensive income (OCI). OCI is made up of items excluded from net income on financial statements. As a general rule, the largest component of OCI is foreign currency exchange gains and losses which do not exist on local foreign trial balances. U.S. shareholders will need to modify their compliance processes to access the required information.
Schedule E totally revamped the information required to determine foreign taxes paid or accrued. Prior to the TCJA, Schedule E provided information in three boxes: taxes paid in local currency, the exchange rate, and the amount of taxes in U.S. dollars. The revisions to Schedule E greatly expand the reporting requirements on the different foreign tax credit buckets. To compute the amount of foreign tax credits associated with each bucket, all expenses must be allocated and apportioned under the foreign tax credit regulations. This requirement will make Schedule E much more labor-intensive and add significant time to its completion.
The new Section G increases the number of questions and includes reporting dollar amounts for many of them. Previously, the schedule only included questions which required yes or no answers.
Similarly, the new Schedule H must be completed on a foreign tax credit category-by-category basis, which will be burdensome.
The new Schedule I-1 contains information necessary to complete new IRS Form 8992, U.S. Shareholder Calculation of Global Intangible Low Taxed Income (GILTI). Schedule A of Form 8892 is aggregated at the shareholder level and used to complete parts I and II of the Form 8892.
Finally, consistent with the theme of requiring significant new information, revised Schedule J doubled in length and the Form added new Schedule P which also asks for copious details.
Completion of Form 5471 will require substantial modification to the methodology previously employed by U.S. shareholders of foreign corporations. Cooperation will be essential between the foreign subsidiary and the U.S. shareholder. Completion of Form 5471 was never an easy task, and the TCJA has added substantial complexity.
The IRS has imposed significant monetary penalties for the filing of incomplete Forms 5471. Failure to timely file Form 5471 and provide the required information could result in a $10,000 penalty. If the information is not filed within 90 days after the IRS has mailed a notice of failure, an additional $10,000 penalty is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure. Other penalties and potential reduction in allowable foreign tax credits could also result. There is also the possibility that the statute of limitations will not run on a tax return with an incomplete Form 5471.
Given these obstacles, it is imperative that the compiling of information starts as soon as possible.
Please contact your Mazars USA LLP professional for additional information.