Form 5471:  An expat’s nightmare

Form 5471: An expat’s nightmare

We recently blogged about the consequences of not being in full tax compliance before expatriating – giving up U.S. citizenship or long-term residency.

Compliance with the U.S. tax laws, especially when it involves international tax matters, can be nearly impossible without the help of an expert in the field. And, the penalties for non-compliance are becoming increasingly more costly.

Example. Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.”  This form is designed to collect information about foreign corporations with respect to certain U.S. persons.  For example, if you are a U.S. citizen or resident and acquire more than 10% of a foreign corporation you must file Form 5471, which is extremely complex and contains many schedules and can take upwards of 120 hours to complete. If you fail to “substantially complete” the form, monetary and other penalties can be applied. Note that “substantially complete” is determined by the IRS, and is not defined in the tax code or regulations—rather, only a few examples are supplied to guide audit examiners.

There are four categories of U.S. persons who must file form 5471. You are required to file form 5471 if you are:

  1. A U.S. 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,
  2. A person who becomes a U.S. person while owning 10% or more of the stock of the foreign corporation,
  3. A U.S. person who had control of a foreign corporation for at least 30 days, or
  4. A U.S. 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 that year.

Whether you fall into one of these categories may not be so clear. Let’s assume for a minute that one of your relatives passes away and leaves you an inheritance in the form of a 25% beneficial interest in a trust. Let’s further assume this trust owns 100% of the stock of a Netherlands corporation. Guess what, you most likely will be considered to indirectly own 25% of the Netherlands corporation and be required to file form 5471.

Now assume you had recently expatriated, or were planning on it, and hadn’t filed form 5471.

This failure to comply could render you a covered expatriate because you cannot certify that you have been tax compliant for the past five years. This could subject you to an exit tax and your heirs to the highest estate and gift tax rates being levied on gifts or bequests from you. If you have already expatriated, you may have falsely certified you were tax compliant when you weren’t.  This could be even more costly.

Here is a great blog from my friend and colleague, Virginia, on the nightmare that is Form 5471, read:  “Expatriation SNAFU! Form 5471: Not “Substantially Complete” at  and learn how getting this wrong could cost you.

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