Do Expats Who Have No Income Still File IRS Form 5471?

Do Expats who Have No Income Still File IRS Form 5471?

When Do Expats File Form 5471?

Out of all the different types of international information reporting forms the IRS requires U.S. taxpayers to file, Form 5471 is one of the most complicated — especially in situations in which the taxpayer is the owner of a controlled foreign corporation (CFC). It is very important for taxpayers who may have ownership or interest in a foreign corporation to timely and accurately report Form 5471 because it is one of the international tax forms at the IRS likes issuing penalties for when the taxpayer has been non-compliant. One key aspect of Form 5471, is that taxpayers are required to file the form in any year they meet the threshold requirement for having to file, even if they are not required to file an annual tax return in that year.

Appeals Court Overrules Farhy

Recently, there have been two Tax Court cases in which the Tax Court decided that the IRS did not have the power to issue automatically assessed penalties (Farhy and Murkhi). Unfortunately, in May 2024 the DC court of appeals reversed the tax court in Farhy, and so now the IRS is again empowered to begin issuing ‘automatically assessed’ penalties for failure to file Form 5471. Thus, taxpayers are not able to rely on the Farhy ruling to avoid penalties the IRS may issue for non-compliance.

Form 5471 Reporting Example

Peter is a U.S. citizen who is the owner of a controlled foreign corporation. He is a 75% owner of the company, along with three other shareholders who are non-U.S. persons. Peter did not earn any income in the current year and the foreign corporation did not issue any income to Peter either in the form of dividends, capital gains, etc. Therefore, since Peter did not earn any income, he’s not required to file a Form 1040. Nevertheless, Peter is still required to follow Form 5471 even though he is not required to file a tax return and even though the foreign company did not issue any income to Peter.

CFC Subpart F/GILTI

As a side note, it is important to note that even if income was not distributed to Peter because the foreign corporation is a controlled foreign corporation, Peter may still have some income tax implications for income that qualifies as either Subpart F income or GILTI.

Failure to File and Penalties

The failure-to-file Form 5471 may result in significant fines and penalties, including the continuing failure to file penalty. Still, taxpayers should take note of the fact that the IRS has developed various amnesty programs to assist taxpayers with safely getting into compliance with prior year non-reporting of Form 5471.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.