Filing Requirements for Overseas Business Investments

Failing to take IRS reporting requirements into consideration is among the biggest mistakes made by U.S. citizens when investing abroad. In addition to FinCEN 114 (the FBAR), U.S. Citizens with a certain percentage ownership in foreign corporations have several filing obligations with steep fines for noncompliance. These filing obligations include Form 8938 and Form 5471.

Form 8938 regarding certain foreign financial assets

Form 8938 must be filed by U.S. citizens, resident aliens and certain nonresident aliens who have “specified foreign assets” with an aggregate value that exceeds a specific threshold. These include:

  • Financial accounts that are maintained by a foreign financial institution, and
  • Foreign assets that are held for investment and not in an account maintained by a financial institution (e.g., stock or securities issued by a non-U.S. person, any interest in a foreign entity, and any financial instrument issued by a U.S. person or with a non-U.S. citizen counterparty).

The threshold for taxpayers living in the U.S. is $50,000 per person ($100,000 for a married couple) on the last day of the tax year, or more than $75,000 ($150,000 for a married couple) on any day of the year. The threshold for taxpayers living outside the U.S. is $200,000 per person ($400,000 for a married couple) on the last day of the tax year, or more than $300,000 ($600,000 for a married couple) on any day of the year.

Form 5471 information return: foreign corporation ownership

A U.S. citizen who owns 10% or more in a foreign corporation, partnership or trust, is obligated to file a Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) every year with their Form 1040 personal tax return (or if owned by a business, LLC, or nonprofit organization, with the entity’s Form 1120, Form 1065 or Form 990 annual return). Form 5471 includes:

  • Information on ownership of the corporation
  • Corporation balance sheet
  • An income and expense sheet for the current year
  • Certain corporate transactions

Note that where U.S. taxpayers comprise over 50% of the ownership interest in a foreign corporation, the corporation is considered a Controlled Foreign Corporation (CFC). Complex rules govern what amount of CFC income is subpart F income which flows through to the taxpayer’s personal or business tax returns and payment obligations – taxpayers are therefore advised to obtain expert tax advice with all such filings.

Under IRC 6038, penalties apply for late filing, incomplete filing, or failure to file Form 5471. Congress imposed harsh penalties due to the IRS’s past difficulties in obtaining information regarding U.S. taxpayers’ interest in foreign corporations. The penalty for failure to file Form 5471 is hefty, beginning at $10,000 per form per year for every 30-day period (or fraction thereof), commencing 90 days following notification of the failure to file – up to a maximum $50,000 penalty per year. In addition, failure to file leaves the taxpayer’s entire return open for audit for three years after the IRS receives the information.

Experienced international tax attorneys

In addition to hefty penalties, the U.S. government may criminally prosecute anyone who does not comply with tax filing requirements. The international and criminal tax attorneys at Moskowitz, LLP have extensive experience in this area of tax law and are here to help. Contact our office today for a consultation.

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