Over the past decade, the U.S. government has dramatically increased the enforcement of laws requiring U.S. persons to disclose sensitive foreign financial information on their federal income tax returns. Many are familiar with FBAR (FinCEN Form 114) obligations to report overseas bank accounts. However, U.S. law also mandates the disclosure of foreign corporation interests, sometimes on an annual basis. Failing to comply can lead to severe civil tax penalties, unlimited audit windows, and, in some cases, referral to IRS-Criminal Investigation, leading to a potentially life-changing criminal tax prosecution.
If you hold any stake—as little as 10%—in a foreign corporation (or certain other business entities), you likely need to file Form 5471 or a related disclosure. Form 5471 is one of the most intricate filing documents the government can require, so having experienced international tax guidance is essential when preparing your submission.
If you have neglected to file foreign information reporting returns or failed to include taxable offshore income on your U.S. tax returns for one or more years—or if you’ve taken a position on a tax return that cannot be substantiated during an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution. At the Tax Law Offices of David W. Klasing, our dual-licensed tax lawyers and CPAs can help ensure you meet all reporting requirements for your foreign business, helping you avoid costly mistakes. For a reduced-rate consultation, reach out to the Tax Law Offices of David W. Klasing online or call us today at (888) 564-1409 for a reduced-rate initial consultation.
Why Form 5471 Matters—And Consequences of Non-Filing
U.S. taxpayers who meet or exceed a 10% interest in a foreign corporation (by vote or value) must often file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) with their U.S. tax return. This requirement applies even when the foreign entity is not a typical “corporation” under local law due to the broad definitions enacted under FATCA.
- $10,000 Penalty, Per Year, Per Form: Failing to file Form 5471 or filing it with significant inaccuracies triggers automatic penalties of $10,000 for each form every year.
- Indefinite Statute of Limitations: If you omit or improperly file Form 5471, the IRS can keep your entire tax return open for audit indefinitely, removing the usual three-year or six-year limit.
Categories of Form 5471 Filers
Form 5471 filers typically fall into one or more of these key categories:
- Category 2: U.S. citizens or residents who serve as an officer or director of a foreign corporation in which a U.S. person has acquired at least 10% of the stock.
- Category 3: U.S. persons who acquire (or dispose of) enough stock in a foreign corporation to push their ownership at or above (or below) 10% in that tax year. Becoming a U.S. person when you already own 10% or more also places you in this category.
- Category 4: U.S. persons who control a foreign corporation, meaning they own more than 50% of the total voting power or the total value of all stock classes.
- Category 5: U.S. persons who own (directly, indirectly, or constructively) 10% or more of the voting stock of a Controlled Foreign Corporation (CFC), where U.S. shareholders collectively own more than 50% of the corporation.
Depending on your category, Form 5471 may require different data, such as your percentage ownership, the corporation’s balance sheet, and any income you derived from it during the tax year.
1.3. GILTI and Subpart F Considerations
Owning a Controlled Foreign Corporation (CFC) may also subject you to Subpart F income reporting and Global Intangible Low-Taxed Income (GILTI) under certain conditions. Even if no distribution occurs, you might need to pick up income on your U.S. tax return. Non-compliance can result in extensive back-tax assessments and penalties. To learn more, contact the dual licensed International & Domestic Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing to get immediate help with whatever domestic and international tax issues you may be facing as soon as possible by calling (888) 310-3543.
Broader Foreign Reporting Obligations (Beyond Corporations)
Foreign-Registered LLCs
If a single-member foreign LLC is not automatically “disregarded” under U.S. law, you may need to elect that status by filing Form 8832. Once classified as disregarded, you must file Form 8858 each year to report the LLC’s finances. If the foreign LLC is treated as a corporation, Form 5471 may still be required.
Foreign Partnerships
If your offshore entity is deemed a partnership for U.S. tax purposes, you might need Form 8865. This form captures ownership details (including control over 50% or a 10%+ stake in a partnership controlled by U.S. persons), balance sheets, and profit/loss statements.
FBAR (FinCEN Form 114)
Any foreign financial accounts—including business bank accounts—are subject to FBAR if their combined high balance exceeds $10,000 at any point during the year. Penalties for not filing an FBAR can be drastic, whether or not you intentionally failed to file. The primary factor that determines the severity of penalties for failing to file FBAR—and subsequently being caught in an IRS audit or criminal tax investigation related to foreign information—is whether your actions were willful (intentional) or non-willful (an honest mistake or miscalculation). In cases of non-willful violations, criminal tax penalties typically do not apply, and civil penalties are generally capped at $10,000 for each calendar year in which an FBAR was not filed.
However, if your failure to file is deemed willful, the maximum penalty increases significantly—from $10,000 per violation to either $100,000 per violation or 50% of the amount in the account at the time of the violation, whichever is greater. Additionally, you could face criminal tax prosecution and incarceration if you are charged with and convicted of tax evasion related to undisclosed offshore taxable income or failures in foreign information reporting. The penalties for not disclosing your offshore accounts can be severe and may have lasting adverse effects on your career and future. To arrange an initial reduced-rate consultation with an experienced California FBAR lawyer, call The Tax Law Offices of David W. Klasing at (888) 640-3408 or contact our office online HERE today.
Key Audit Triggers & High-Risk Areas
- Insufficient Disclosure: Not filing Form 5471 (or its equivalents) for each entity in which you meet a 10% ownership threshold.
- Undisclosed Dividends or Capital Gains: Omitting or underreporting dividends, royalties, or gains received from a foreign corporation.
- Transfer Pricing or Related-Party Transactions: Non-arm’s-length pricing between your foreign corporation and U.S. entities can hint at income shifting.
- Controlled Foreign Corporation Non-compliance: Missing Subpart F or GILTI inclusions for a CFC signals potential tax evasion.
- Constructive Ownership Misunderstandings: Under Internal Revenue Code § 318 (applied to foreign entities), you might be treated as owning stock held by a spouse, partner, or even a parent corporation.
Consequences of Non-compliance
Civil Tax Penalties
- $10,000 per Missed or Incorrect Form 5471: Penalties can escalate if you fail to correct these oversights.
- Unlimited Audit Look-Back: The IRS can revisit and reassess older returns at any time.
- Accuracy-Related Penalties: Understatements or negligence can incur penalties of 20–40% of the unpaid tax.
Criminal Tax Exposure
Willfully hiding foreign ownership or failing to report overseas income can lead to criminal tax charges such as filing false returns or tax evasion. Convictions may carry substantial fines and potential prison sentences.
Strategies to Minimize IRS Audit Risks
Identify All Applicable Entities
Clarify whether your foreign business is considered a corporation, partnership, or disregarded entity for U.S. tax.
File Timely, Accurate Forms
For each tax year, file Form 5471, Form 8865, Form 8858, and FBAR (FinCEN 114) as required, providing complete and accurate details.
Monitor Constructive Ownership
Remember that shares owned by your spouse or certain family members might “count” toward your ownership stake, potentially pushing you into a mandatory reporting category.
Maintain Comprehensive Documentation
Keep robust financial statements, organizational charts, bank records, and corporate governance documents—especially if you anticipate related-party transactions.
Seek Expert Assistance
Engage an experienced dual-licensed tax attorney-CPA as soon as possible to ensure compliance with complex regulations and to protect you in case of a high-risk audit or IRS-CID’s criminal tax inquiry.
Contact the Tax Law Offices of David W. Klasing Today If You Own an Interest in a Foreign Corporation
At the Tax Law Offices of David W. Klasing, we understand the intricate challenges of international tax compliance and the severe risks that non-compliance can pose. Our dual-licensed Criminal Tax Defense Attorneys & CPAs have decades of experience in evaluating your ownership thresholds and determining which filings—such as Forms 5471, 8865, or 8858—are required, as well as whether you must report via FBAR. We guide you through filing or amending past returns via domestic or offshore voluntary disclosure, which is critical if you have willfully committed tax crimes—such as failing to file foreign information returns or evading U.S. income tax on offshore income. If you self-report your fraud before the IRS initiates an audit or criminal investigation, you can typically be brought back into compliance with a near-guaranteed pass on criminal tax prosecution and reduced civil penalties. We also conduct comprehensive constructive ownership analyses to ensure you fully understand any family or spousal stock attribution rules, preventing inadvertent underreporting.
It is imperative to engage an experienced criminal tax defense attorney to navigate the voluntary disclosure process, as only an attorney can ensure that all communications remain protected under Attorney-Client Privilege and Work-Product Privileges—preventing your non-attorney advisors from being compelled to testify against you. Our firm provides a one-stop solution, combining the skills of criminal tax defense attorneys, Kovel CPAs, and enrolled agents to achieve optimal results that protect both your liberty and your net worth. Whether you’re facing an IRS audit or considering a voluntary disclosure to correct past non-compliance, contact the Tax Law Offices of David W. Klasing at (800) 681-1295 or reach out online HERE to schedule a reduced-rate initial consultation. See our testimonials to learn how we’ve helped clients safeguard their futures.
