On December 13, 2016, the IRS issued T.D. 9796, new regulations that require U.S. disregarded entities owned by a foreign person to file U.S. Federal Form 5472. The new Form 5472 filing requirement applies for tax years beginning after December 31, 2016 and ending on or after December 13, 2017.
Form 5472 is required to be filed by a reporting corporation that engages in reportable transactions with a U.S. or foreign related party. For this filing requirement, a reporting corporation is defined as either a U.S. C Corporation owned directly or indirectly by a 25% foreign shareholder or a foreign corporation engaged in a U.S. trade or business. The new regulations now state that a reporting corporation for the Form 5472 will include a U.S. disregarded entity that is owned directly or indirectly by one foreign person. A U.S. disregarded entity is a company or a grantor trust which is owned 100% by one person that is treated as the owner of all assets, liabilities, and income of the entity. A U.S. disregarded entity is considered to be owned indirectly by a foreign person if it is owned through one or more other disregarded entities or grantor trusts. The new regulations also expand the scope of reportable transactions to include the foreign owner’s capital contributions to a U.S. disregarded entity and distributions from a U.S. disregarded entity to its foreign owner.
The IRS has not yet updated U.S. Federal Form 5472 to reflect the new changes beginning with the 2017 tax year. It is unclear whether a U.S. disregarded entity with reportable related party transactions will be required to file Form 5472 separately with the IRS apart from a U.S. tax return. Based on the new regulations, the U.S. disregarded entity is classified as a U.S. C Corporation solely for purposes of the Form 5472 filing requirement. The IRS has not yet announced whether the U.S. disregarded entity would be required to file a U.S. corporate income tax return with the Form 5472 attached to report transactions with related parties.
In order to file Form 5472 as a reporting corporation, the U.S. disregarded entity will be required to obtain a U.S. FEIN as a taxpayer identification number. When applying for a FEIN for the U.S. disregarded entity on the U.S. Federal Form SS-4, it is necessary to provide the name and U.S. FEIN, Social Security Number (SSN), or individual taxpayer identification number (ITIN) of the foreign owner as the responsible party. This will require a foreign nonresident individual owner of a U.S. disregarded entity to apply for an ITIN on U.S. Federal Form W-7. There are certain procedures that a nonresident individual must follow to file the Form W-7 ITIN application. The processing time for the Form W-7 ITIN application with the IRS can take several months.
The new regulations also exclude a U.S. disregarded entity with a foreign owner from certain regulatory exceptions to Form 5472 recordkeeping requirements. Those exceptions typically exempt small corporations from the recordkeeping requirements if the corporation has less than $10 million in gross receipts and $5 million or less of reportable related party transactions that are less than 10% of gross income. A U.S. disregarded entity with a foreign owner is not eligible for such exceptions.
Form 5472 is an important U.S. international tax reporting requirement that should not be overlooked. The failure to file or the late filing of the Form 5472 can result in a $10,000 USD penalty per related party, per year.
For more information, please contact Alison Dougherty at ADougherty@aronsonllc.com or 301.231.6290. Alison will be presenting a webinar on Form 5472 filing requirements and the new regulations on September 12, 2017. For more information and to register, please see visit the Strafford website.
Foreign Accounts, Offshore Assets, Ownership of Foreign Companies, Foreign Gifts and Inheritances, or Interests in a Foreign Trust?
It is a common misunderstanding that a person with U.S. citizenship or residency believes foreign accounts, foreign sources of income, and foreign assets do not need to be reported on their U.S. federal tax return. A failure to report such income to the IRS and other U.S. government agencies can result in substantial penalties. With increased enforcement in U.S. federal international tax reporting and compliance, many U.S. individuals are now becoming aware of reporting requirements.
A U.S. individual that owns or has signature authority over a foreign account may be required to disclose the account on the U.S. Foreign Bank Account Report (FBAR), which is filed with U.S. FinCEN. There is a $10,000 civil penalty per year for the non-willful failure to file the FBAR on time. Failure to report foreign account balances to FBAR can carry a penalty of up to $100,000 USD or 50% of the unreported foreign account balance for the intentional failure to file the FBAR. Furthermore, intentional or willful failure to file the FBAR can lead to criminal prosecution and imprisonment.
In addition to the FBAR, U.S. federal Form 8938 Statement of Specified Foreign Financial Assets also discloses ownership of foreign accounts. Form 8938 is required to be filed with a U.S. federal income tax return. Failure to file the form on time will result in a $10,000 USD penalty per year. Beginning for tax years ending on or after December 31, 2015, certain U.S. companies with foreign financial assets must file Form 8938. Previously, only U.S. individuals were required to file Form 8938. There are U.S. Treasury regulations, which now provide the rules regarding Form 8938 filing requirement for U.S. companies.
A U.S. individual may be required to file U.S. federal Form 5471, to report ownership of a foreign corporation, a Form 8865 to report ownership of a foreign partnership, or a Form 8858 to report ownership of a foreign disregarded entity. Failure to file any of these forms on time with a U.S. federal tax return carries a $10,000 USD penalty per year.
A U.S. individual may be required to file U.S. federal Form 3520, to report the receipt of a gift from a nonresident individual or an inheritance from a foreign estate. Failure to report a foreign gift or inheritance could carry a penalty up to 25% of the undisclosed amount.
A U.S. individual may be required to file U.S. federal Form 3520, to report a distribution from a foreign trust or Form 3520-A to report an interest as a U.S. grantor of a foreign grantor trust. Failing to file these forms could result in substantial penalties.
Amnesty programs provided by the IRS are available for U.S. individuals with prior year U.S. international tax reporting delinquencies. Under certain circumstances, the U.S. individual may be able to file the prior year U.S. international reporting forms without penalties.
To avoid penalties, consider working with a qualified U.S. international tax reporting and compliance expert who knows what options are available and can effectively prepare these forms for prior years as necessary. It is advisable to file prior year FBARS and Forms 5471, etc. before filing the current year tax return. Keep in mind that the current year tax return must still be filed on time to avoid penalties. Filing your current return can increase the chances of penalty abatement relief with respect to the prior year filing delinquencies.
Remember when international reporting disclosures required on U.S. Federal Form 1065 partnership tax returns were focused on foreign partner tax withholding? In 2017, partnerships that file U.S. federal partnership tax returns for the 2016 tax year using Form 1065, must make more extensive international tax reporting disclosures. Here are some items to pay close attention to on Form 1065.
These new disclosure requirements on U.S. federal Form 1065 partnership tax returns likely resulted from the IRS’s continuing efforts to increase compliance with U.S. international tax reporting requirements. With global expansion and increasing cross-border international activities, these reporting requirements are particularly important to discuss with a qualified U.S. international tax reporting and compliance expert. If your U.S. or foreign partnership files a U.S. federal Form 1065, these reporting requirements should be a top priority to avoid substantial penalties. Under some circumstances, it is possible for U.S. filers, including partnerships, to qualify for certain amnesty relief from penalties for prior year failure to file delinquencies. With proper guidance, a partnership can potentially qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, etc. without late filing penalties.
Historically, partnerships were required to disclose ownership of foreign corporations and partnerships on U.S. federal Form 1065, and ownership by foreign parties. These disclosures are still required on the 2016 U.S. federal Form 1065.
Avoid this common misunderstanding. U.S. corporate leaders may assume that their U.S. federal Form 1120 corporate income tax return does not need to be filed on time if the company has a loss for the year. If the U.S. corporation owns an interest in a foreign subsidiary corporation, this misunderstanding can cost a U.S. corporation with a net operating loss substantially in penalties.
The applicable penalties are assessed based on failure to file U.S. federal Form 5471 with the tax return on time. There is a $10,000 USD penalty per year, per foreign subsidiary corporation for failing to file the Form, which reports ownership of a foreign subsidiary corporation, on time.
U.S. federal corporate income tax penalties, such as late filing and late payment penalties are typically assessed on the unpaid tax due with the tax return. If the corporation has a net operating loss for the year and zero taxable income, then no tax is due with the tax return so certain penalties would not be assessed.
Late filing penalties are automatically assessed on any U.S. federal corporate income tax return that is filed after the due date with a Form 5471 attached. In some cases, a corporation may incur net operating losses for several years and stop filing U.S. federal corporate tax returns during that time. Resulting in a problem: how to resolve the prior year Form 5471 filing delinquencies when the corporation starts to earn a profit in subsequent years and starts filing tax returns again.
In addition to the prior year Form 5471 filing delinquencies, the U.S. corporation may have been required to file a prior year Foreign Bank Account Report (FBAR) to report foreign accounts owned by the foreign subsidiary corporation. Late FBAR filings can also lead to a minimum penalty of $10,000 USD per year.
It’s vital to speak to a qualified U.S. international tax reporting professional to resolve the prior year filing delinquencies. Form 5471 reporting and FBAR preparation often involve specialized skills in the area of U.S. international tax that many general tax practitioners may not have. A qualified U.S. international tax-reporting specialist can provide guidance on how to navigate certain IRS amnesty filing procedures including Form 5471 and FBAR penalty abatement.
With proper guidance, a corporation may qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, without any late filing charges. It is advisable for a corporation to catch-up with its prior year filings before filing its current year tax return, Form 5471, and FBAR. This approach will improve the corporation’s chances of qualifying for relief from the penalties.
The U.S. Treasury has issued proposed regulations governing the filing of U.S. Foreign Bank Account Reports (FBAR). The new rules provide several key revisions to the existing FBAR regulations under 31 CFR § 1010.350. The FBAR regulations are issued under the legislative authority of the Bank Secrecy Act. Key points of the proposed regulations include:
1. The requirement would be eliminated for U.S. officers, employees, and agents of U.S. entities to report signature authority over foreign financial accounts owned by the entity if the individual does not have any financial interest in the account. The U.S. officer, employee, and agent of the U.S. entity would not have to report such accounts on their respective individual FBAR, if the accounts are reported on an FBAR filed by their employer or any other entity within the same corporate or business structure. The employer would be required to maintain records for five years to document all U.S. officers, employees, and agents with signature authority over the entity’s accounts.
2. The relief which currently allows limited reporting on the FBAR when a filer has 25 or more reportable accounts would be eliminated. The proposed rule would require U.S. persons with 25 or more reportable accounts to provide the detailed account information for each reportable account on the FBAR in the same manner as filers with less than 25 accounts.
3. The new FBAR filing due date will be April 15, with a six month extension allowed to October 15, beginning with FBARs filed for the calendar year 2016.
For more information, please contact Aronson LLC tax advisor Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.