New IRS reporting requirement to US persons

STARTING 2015, filer of Form 8938 who satisfies the reporting obligation by completing Part IV Excepted Specified Foreign Financial Assets, must complete the newly added checkbox on item D on Form 5471 (discussed in this column), Form 3520,3520-A, 8621, or 8865 (not discussed in this  column).

What is a controlled foreign corporation (CFC)?

• more than 50% of total voting power is owned by a US person.

• control of USperson is for an uninterrupted period of 30 days or more during the tax year.

Who may be required to file Form 5471?

• US person who meets the 10% stock ownership requirement with certain foreign corporation.

• US shareholder of a CFC.

Who are US persons?

• US citizens and resident aliens.

• US domestic corporations.

• US domestic partnerships.

• US domestic trusts.

When and Where to File Form 5471?

• Filed with your annual return Form 1040 or partnership, exempt organization, by the due date.

• Annual return includes income tax return or information return.

What If I Fail to File Form 5471?

You will be subjected to a $10,000 penalty. A continuing failure of more than 90 days after the day on which IRS mails a notice subjects the particular person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure persists after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure. If the failure was due to reasonable cause and not willful neglect, then, no penalty applies.

What if the corporation is using currency other than US currency?

• foreign currency must be translated into US dollars at the end of the year.

• translate functional currency to US dollars using the method specified for example, use average exchange rate for the tax year in accordance with the rules of section 986(a).

In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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