Comprehensive Review of an IRS Final Notice of Intent to Levy

Receiving any notice from the Internal Revenue Service is enough to make most people’s heart
skip a beat. However, one notice in particular that is issued by the Internal Revenue Service, the
Final Notice of Intent to Levy may strike the most fear and concern in taxpayers and rightfully
so. This article provides detailed information relating to a Final Notice of Intent to Levy and
your rights as a taxpayer.

What is a Final Notice of Intent to Levy?

When a tax liability or tax debt is owed, whether individual income tax or business-related
taxes, the IRS issues a series of notices. The first notices issued by the IRS act more to provide
notice of the liability and request for payment. If the liability is not paid in full or an agreement
reached with the IRS, the IRS will continue to issue notices and the notices increase in severity
eventually leading to the Final Notice of Intent to Levy. The Final Notice of Intent to Levy is the
IRS’ means to provide the taxpayer notice due process and that the government intends to levy
the taxpayer’s property such as bank accounts, wages, sources of income, and even real estate or
other assets if the tax liability is not paid or certain agreements with IRS are not formalized or
proposed. The Final Notice of Intent to Levy issued by the IRS allows the taxpayer 30 days to
make the proper arrangements or proposal to prevent levy or enforcement action. If certain
agreements or proposals are not reached within these 30 days from the issuance of the Final
Notice of Intent to Levy, the taxpayer is then open to levy and enforcement action from the IRS
to collect on the tax debt.

When and How is a Final Notice of Intent to Levy Issued by the IRS?

After the IRS has issued multiple notices regarding the tax liability and the tax liability is not
paid or a proper agreement formalized or proposed with the IRS, the IRS will eventually issue a
Final Notice of Intent to Levy. The timing of issuing the Final Notice of Intent to Levy can
differ depending upon whether the tax liability is with IRS Automated Collections or if the tax
liability has been assigned to an IRS Revenue Officer. If the tax liability is with automated
collections, it may take longer for the Final Notice of Intent to Levy to be issued, and the notice may be
issued from an IRS collection service center. If the tax liability has been assigned to an IRS
Revenue Officer, generally one of the first actions taken by the revenue officer is to issue the
Final Notice of Intent to Levy. While the issuance of the Final Notice of Intent to Levy does not
necessarily mean the revenue officer will immediately levy if they are legally able to, but rather
the IRS wants to have the ability to levy and enforce collection of the tax if necessary and thus
one of the primary reasons the revenue officer will usually issue the notice relatively quickly
once they have been assigned to collect on the tax. In short, the enforcement action available to
the IRS can be used if the revenue officer deems it necessary instead of waiting to find out if the
final notice has not been issued.

What is a Levy Under the Context of a Final Notice of Intent to Levy?

Under this context, a levy is a taking property by the IRS to collect on the underlying tax debt.
This means the IRS takes or seizes your property to satisfy all or a portion of the tax bill. A
common levy for the IRS would be a bank levy or a levy of your wages or income. Under the
context of a bank levy, the IRS will issue a notice of levy to the bank or banks they know or feel
the taxpayer may have a bank account. Upon receipt of the levy notice, the bank is to “freeze” or
hold all of the funds in the bank account or accounts held by that bank up to the amount of the
levy. The bank is to hold these funds for 21 days and then release all of the funds over to the IRS
after the 21 day period unless the bank levy is released or other instructions are provided to the
bank by the IRS. Bank levies can cause problems beyond the taking of the money if the taxpayer
has written checks or other auto payments scheduled as the bank is likely to not honor these
payments and the checks will bounce or payments not go through. The bank levy is generally a
one-time levy, meaning the bank will not continuously hold funds and turn them over to the IRS,
but rather only hold and pay over the funds in the account the day the bank received
and processed the levy. In comparison, a wage levy is generally a continuous levy.
Under the context of a wage levy, the IRS issues a levy notice to your employer and the
employer then withholds a portion (a relatively large portion) of your wages and pays the funds
over the IRS. This wage levy is usually continuous meaning that with each payroll period, your
employer will withhold the levied funds until the levy is either released or the terms of the wage
levy are adjusted by notice from the IRS.

What can be done to Prevent an IRS Levy Once I Have a Received a Final Notice?

Once a taxpayer has received a Final Notice of Intent to Levy from the IRS they are definitely
under the gun to take action to prevent enforcement. Paying the liability in full or establishing a
formal payment installment agreement with the IRS will prevent enforcement such as bank or wage
levies. Formally proposing an offer in compromise that is deemed processable will prevent
levies as well. In addition to the above, the Final Notice of Intent to Levy provides the taxpayer
with what can be a very useful tool of due process, which is the right to request a Collection Due
Process Hearing. The Request for a Collection Due Process Hearing acts as a hold on any
enforcement action on the tax periods included within the Final Notice of Intent to Levy if the
request is filed within 30 days from the date of the Final Notice of Intent to Levy. Upon
requesting a Collection Due Process Hearing, your file or the tax liabilities are sent to the IRS
Appeals Office and a hearing or conference will be scheduled to discuss collection alternatives as
opposed to levies to collect or resolve the tax liability. There is an automatic stay or hold on
enforcement until you have been able to conduct a hearing and communicate with an appeals
officer regarding a resolution to the tax liabilities. If an agreement is reached with the appeals
officer through the hearing, this will act as a hold on enforcement. If an offer in compromise is
submitted through the appeals officer, this will also act as a hold on enforcement until a
determination is reached regarding the offer. If you are unable to reach or propose any collection
alternative with the appeals office that acts a hold on enforcement, the IRS Appeals Office will
issue a determination sustaining the levy action proposed by the IRS and your case will either go
back to general collections or the revenue officer and you will be subject to or “open” to levy and
enforcement, which is not preferred and what you are trying to avoid. It is important to note that
even if you do not request a Collection Due Process Hearing within 30 days from the date of the

final notice, you still have the right to request a hearing called an equivalent hearing with the
appeals office. The biggest difference between the equivalent hearing and collection due process
hearing is that the equivalent hearing does not necessarily act as or guarantee you a hold on
enforcement action, which may be problematic if you request the equivalent hearing and the IRS
moves forward with levy and enforcement action.

Can a Bank Levy or Wage Levy be Released?

The good news is, yes. If the IRS has issued a bank levy or wage levy, you may be able to have
the levy released or partially released. If the IRS has levied your bank account, under certain
circumstances (generally those showing an economic hardship has been created) the IRS can
agree to a full or partial release of the levy. If the IRS agrees to any type of release of the bank
levy, the IRS will issue a notice to the bank either providing for a full levy release or releasing a
portion of the funds the bank is holding pursuant to the bank levy. If the IRS is levying your
wages, the IRS can agree to release the wage levy in full, or the wage levy can be
adjusted/lowered to an amount that you are able to show does not create an economic hardship.

Does the Release or Adjustment of a Levy Mean the IRS Will Not Levy Again?

Not necessarily. If the IRS releases a levy but you fail to fully resolve the tax matter with a
payment agreement or settlement, you could be open to another levy in the future. Generally, if
the IRS is forced to levy again, they may be less likely to release the levy given the prior release
and fact the underlying issues leading to the need to levy have not been resolved.

Receiving a Final Notice of Intent to Levy from the IRS means that you have a tax liability that
needs immediate attention. If you are unable to resolve the tax liability immediately after
receiving the final notice, it is highly recommended you speak with a tax attorney to discuss the
facts and circumstances of your case, your options to resolve the tax matter and the necessary
procedural steps to resolve the matter without enforcement action from the IRS.

Contact The McGuire Law Firm to discuss your tax issues with a tax attorney.

You may have heard the ads on the radio, maybe seen them on TV, or companies
have even called you about receiving tax relief by settling your tax debts through the IRS Offer
in Compromise Program. Are these ads true?

Can you settle your tax debts with the IRS through an offer in compromise?

The answer is – maybe. The IRS Offer in Compromise Program may allow you to settle your tax debt, but your financial circumstances and other circumstances must make you eligible for the OIC Program. The information below provides a comprehensive look at settling your tax debts through the IRS Offer in Compromise Program.

What is an IRS Offer in Compromise?

In short, this is a tax settlement. You offer the IRS an amount of money to settle your tax debt. Upon payment of the settlement amount, your tax debts
are cleared, tax liens are released, and you owe no tax.

Who is Eligible to Participate in the Offer in Compromise Program?

Technically, anyone can submit an offer in compromise to the IRS. However, the taxpayer must comply for the IRS to process an offer in compromise. Compliance means that all tax returns required to have been filed are actually filed and that any tax payments due have been paid in full. If you are not compliant, the IRS will return your offer in compromise. Additionally, to have a good chance of the IRS accepting your offer in compromise, your recent and current financial circumstances must be in an overall position where the IRS would agree to a settlement.

How Much Will it Take for the IRS to Settle my Tax Debt?

Your IRS offer in compromise, or “settlement amount” is based more on your ability to pay than the total amount of tax you owe. To calculate your offer in compromise amount, the IRS will look at your income and expenses, and your equity in assets. Generally, the IRS will only accept an offer in compromise when, based on your income and expenses and equity in assets, you cannot satisfy your tax liability. There are exceptions and conditions whereby the IRS may accept an offer in compromise even if you have the ability to pay the tax debt in full. These exceptions are discussed in greater detail below.

IRS will initially calculate your offer amount using the following equation: Your disposable income multiplied by 12 or 24 plus your equity in assets. Let’s look at equity in assets first. All of your assets from homes and cars to retirement accounts and bank accounts (and other assets) are considered when the IRS looks at your ability to pay. When considering equity, the IRS will allow reductions of the fair market value of assets and debts on assets. For example, the IRS allows for a 20% reduction when calculating the equity in your home. Thus, if your home had a fair market value of $350,000 and you owed $250,000 on the mortgage for your home, you would have $30,000 in equity for purposes of the offer in compromise calculated as follows: $350,000 x .8 = $280,000 – $250,000 (mortgage) = $30,000 in equity. You also receive a reduction of 20% in the fair market value of retirement accounts, investment accounts, and other assets when calculating the equity for purposes of the offer. Your disposable income is calculated by totaling all income from all sources and subtracting your allowable expenses. Thus, you would include income such as wages, interest, dividends, business income distributions, and other sources in your total income.

Your allowable expenses (also referred to as the national standard for allowable living expenses) are set by the IRS and can be found on the IRS website. The allowable living expenses are dictated primarily by where you live and the number of individuals in your household. Allowable living expenses include food, clothing, housing, utilities, car payments, car operating expenses, and out-of-pocket healthcare expenses. You can claim your actual healthcare expenses if your allowable out-of-pocket healthcare expenses exceed the allowable standard. Once you have calculated your total income and all allowable expenses, the difference is your disposable income, and the figure is multiplied by either 12 or 24 and then added to your equity in assets for the offer in compromise amount. For example, if your disposable income was $600 per month and the only equity you had was in your house per the example above, your over amount would be $37,200, calculated as $600 x 12 + $30,000.

What Forms and Documents Do I need to Submit with my Offer in Compromise?

The IRS has specific forms you need to submit when proposing an offer in compromise. As an
individual, you would complete Form 433A OIC, which is the financial statement whereby you
provide your asset, income and other financial information. In addition to Form 433A OIC, you
would submit Form 656. Form 656 is the form whereby you state your personal information, the
tax years or liabilities you are proposing to settle and the offer in compromise terms (offer
amount and payment terms). The attachments and documents you need to submit with the offer
in compromise will be determined by the items and issues on your financial statement primarily
and perhaps whether or not you are claiming any extenuating circumstances on your offer. For
example, you need to provide your most recent bank statements for all bank accounts, current
statements for any retirement account or investment accounts, current mortgage statement for
any real estate you own, current statement for any vehicle payment showing the monthly
payment and total loan amount and documents such as pay stubs or profit and loss statements to
verify your income. Please note, if you own a business, you may have the requirement to submit
a business financial statement on Form 433B and attach related documents and substantiation for
the business.

Once I Submit My Offer in Compromise What is the Process?

Generally, you will receive a notice from the IRS that the offer has been received and that you will receive contact within 90 days. However, it usually takes about 6 months for an IRS offer examiner to make contact with you with anything material. When the offer examiner does contact you, they may make a request for additional documentation and have a list of questions or issues to discuss to with you. Eventually, the examiner will provide a determination with an equity in asset table and an income and expense table. The equity in assets table will list each asset, the fair market value applied to the asset, the reduction to fair market value (if any), any loan or encumbrance on the asset, and then the equity allocated to the asset. Then all of the equity amounts are totaled. The income and expense table will state the income you claimed and the income as allocated by the IRS, and then all of the expenses you claimed on the 433A OIC financial statement versus the expenses allowed by the IRS to thus calculate your disposable income. The equity in assets and the disposable income are then applied to provide your offer amount.

What Determinations Can The IRS Make on My Offer?

Based upon the figures in your equity in asset table and income & expense table, the IRS can accept the offer as you submitted, reject the offer amount you offered but agree to accept an increased offer amount or reject the offer because your equity in assets and disposable income show that you can full pay the liability. If the IRS does reject your offer, you have the right to request an appeal of the rejection and work with the IRS Appeals Office to see if an agreement on a settlement can be reached.

What Happens When I Appeal The Offer Rejection?

When the offer rejection is appealed, you are assigned an appeals officer to consider the items and issues you disagree with. The appeals officer assigned to your case will send you a notice calling for an initial conference. You are allowed to provide additional information and documentation to the IRS Appeals Officer and the appeals officer will consider all information and make a determination to accept an offer or sustain the IRS’ rejection of your offer. Many offers are accepted through the appeals process and thus one should not lose hope if their offer is initially rejected by the IRS offer examiner.

If the IRS Accepts My Offer in Compromise What Other Obligations Do I Have?

Beyond paying the agreed-upon offer amount, the IRS requires that you remain in compliance by timely filing all returns and paying all taxes for the five years after the offer. If you fail to remain in compliance, the IRS can default the offer and settled liabilities would be due and owed again.

If you have any questions about your offer in compromise, please get in touch with a tax attorney at The McGuire Law Firm or schedule a Free Consultation with one of our 24/7 live agents.

What is the FBAR?

The U.S. government requires individuals to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). It is designed to ensure that foreign assets and income are correctly reported, helping the Department of Treasury track the activities of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.

Who Must File an FBAR?

A U.S. person, which includes citizens, residents, corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. This situation occurs when a person in the US has a financial stake in or control over a financial account located outside of the country, and the combined worth of all the foreign accounts is over $10,000 (in US dollars) at any point during the year.

It’s important to note that the foreign financial account does not need to generate income or taxable income for the account to trigger the need to file the FBAR. If the balance of all foreign financial accounts exceeds the $10,000 threshold, each foreign account or asset must be reported, regardless of whether you received income from the foreign account and no matter how small or low the account’s value may be.

FBAR Compliance and Filing

Ensuring compliance with FBAR filing requirements is crucial. The FBAR report must be submitted annually by April 15th for the previous year. In case you miss the due date, you can get an extension until October 15th without having to make a request for it. There’s no need to file for an extension separately for the FBAR.

The FBAR is not filed with your individual tax return. Instead, you file the FBAR electronically through FinCEN’s E-filing system. You may be able to paper file the FBAR, but to do so, you must receive an exemption to E-filing from FinCEN. You are allowed to have a third-party file your FBAR on your behalf.

To properly file your FBAR, you will need the following information:

• The taxpayer’s name, address, date of birth (if an individual), social security or employer identification number
• Name on the foreign account
• Name and address of the foreign bank or financial institution
• Account number or identifying number for the foreign account
• Type of account or foreign asset
• The maximum value in U.S. dollars of the account during the year.

All foreign financial accounts are generally reported on one FBAR, even if the accounts are held only by you or jointly.

While the law does not require any specific record-keeping for the FBAR, it is highly recommended that you keep all of your forms or statements to verify the information stated on the FBAR and the exchange rate you used if you converted foreign currency into U.S. dollars.

Penalties for Non-compliance

Failure to comply with FBAR filing requirements can lead to severe penalties. Both civil and criminal penalties can apply when an FBAR is not timely filed.If you fail to file the FBAR, you may be penalized up to 50% of the account or asset value that was not reported.This means you could lose up to half of the value of your foreign account or asset by not filing the FBAR.

Other Foreign Compliance Forms

If you are reporting foreign assets on the FBAR, you may also have the requirement to report these assets elsewhere. If you have a foreign bank account, there are boxes on Schedule B that may need to be checked. Additionally, you may have income to report on your Schedule B. Other common forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The specifics surrounding your foreign asset reporting will dictate the form or forms you need to file and how and where the forms need to be filed.

What If I Have Failed to File FBARs for One Or Multiple Years?

If you have not filed your FBARs and are not already under an investigation by the Department of Treasury, you may be able to file your FBARs and other foreign compliance forms and unreported foreign income through specific programs with a lesser penalty. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS has a Delinquent International Information Return Submission Program. These programs differ, and weighing your options and potential outcomes with your specific facts and circumstances is essential.

Taxation on Foreign Income from FBAR Accounts or Assets

Foreign income is taxable and would be included on the appropriate form or schedule on your tax return and thus subject to U.S. tax. For example, interest from a foreign bank account would be reported just like interest from a U.S. bank and subject to ordinary income tax.

What If I Have Already Paid Tax To A Foreign Country?

If you paid taxes to a foreign country, you might be eligible for the foreign tax credit. This credit allows you to apply all or part of the tax you have already paid to your total tax bill. Form 1116 is completed to claim the foreign tax credit.

FBAR Updates

As of July 1st, 2013, the electronic version of the FBAR is currently available and must be filed electronically. This is part of FinCEN’s efforts to streamline the filing process and make it more efficient.

In addition, FinCEN has provided some relief to victims of recent natural disasters, allowing them more time to meet their FBAR filing obligations. This is a reminder that the government considers extraordinary circumstances that may affect taxpayers’ ability to file on time.

Conclusion

If you have any questions about whether you have an FBAR filing requirement or have the FBAR filing requirement and have not filed, it is highly recommended that you speak with a tax professional, preferably one specializing in international tax compliance, to determine your compliance requirements and options. FBAR compliance is critical and can lead to hefty civil and criminal penalties.

Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Tax-exempt and/or nonprofit organizations may be required to file form 5471. There are several instances where form 5471 would be required. Often, detailed analysis and thorough understanding of the tax rules are required to determine if there is a filing obligation. Failing to file (including late filing) for form is subject to a $10,000 penalty on a per form per year basis. The penalty may be abated if the taxpayer has reasonable cause for the failure to file the form 5471.

Please consult with a qualified professional when making determinations of form 5471 filing obligations. As you might expect, I am such a qualified professional. Please reach out with any form 5471 questions. Please see my contact information below.

When is a tax-exempt and/or nonprofit entity or organization required to file form 5471?

On its face, it seems unlikely that tax-exempt (TE) and/or a nonprofit (NP) entity or organization would ever be required to file form 5471, but there are a number of occasions where the form 5471 is required to be filed by a TE and/or NP entity .

To understand the form 5471 filing requirement, it helps to know who is required to file form 5471? In a very condensed summary, US persons (individuals, corporations, partnerships, trusts) are required to file form 5471 if they own or control certain percentage amounts of a foreign corporation. Specifically, if a US person owns, controls, purchases or disposes of 10% or more of a foreign corporation, there is a strong likelihood of a form 5471 filing obligation at some point in the lifecycle of the investment. US entities or people who own 10% or more of a foreign corporation are considered US Shareholders for definitional purposes of form 5471 filing obligations. For a more thorough discussion on when a form 5471 is required to be filed, please read this discussion.

US TE and NP organizations are generally organized in one of two ways: either as a state corporation or a trust. Both corporations and trusts are subject to the rules for filing form 5471 as they are specifically considered US persons as defined by the Internal Revenue Code (IRC). As such, TE and NP organizations would be considered US persons for purposes of applying the form 5471 filing rules.

There are a couple reasons why a TE and/or NP organization would own shares in a foreign corporation. First, and the most obvious, is the organization has established an entity in foreign country to carry out its mission. For the vast majority of TE and/or NP organizations, this scenario won’t arise, but could be a possibility. Second, the TE and/or NP has invested in a foreign corporation either directly or indirectly through its fund investments. The most likely instance a TE and/or NP organization would have a form 5471 filing obligation arises when that organization has made investments in non-open market vehicles such as hedge fun or private equity fund investments. Hedge fund, private equity fund and special purpose investments can give rise to form 5471 filing obligations depending on how the investment is structured.

Why should a TE and/or NP organization care if had or has a form 5471 filing obligation?

In short, penalties. Failure to file form 5471 may result in a $10,000 penalty per form per year. Additional penalties may apply depending on category filer the shareholder falls into for form 5471. Filing the form 5471 late is considered a failure to file the form and subject to penalty.

For a large organization, the failure to file penalties can add up to a large amount if it is determined the organization has failed to file multiple forms 5471 over several years.

What can be done to prevent the form 5471 penalty?

Timely filing the from 5471 will prevent a penalty. If the 5471 is already delinquent, the organization may be able to avoid the penalty if it has reasonable cause for its failure to file. Note, reasonable cause is ill defined and a fairly subjective standard in the hands of an IRS examiner.

Where does form 5471 get filed?

Generally, the form 5471 is attached to an income tax return. For a TE and/or NP entity, the form 5471 is generally attached to form 990-T, whether or not the organization has any unrelated business taxable income.

How can a TE and/or NP organization tell if they have a form 5471 filing obligation?

The only sure way to tell if the organization has a form 5471 filing obligation is through a thorough analysis of its investments. Often, it is not obvious that an investment has been made in a foreign corporation, but taking the following steps could help make the determination:

• Step 1
  • Analyze each of the investments the TE and/or NP has made to determine if it is a foreign or US formed entity.
• Step 2
  • If the entity is foreign, determine what type of entity it is and if there have been any US choice of entity elections made.
• Step 3
  • If the foreign entity is a corporation for US tax purposes, determine how much of the entity is owned by the organization. This ownership analysis includes determining the percentage owned of value of the foreign corporation and the percentage owned of voting rights of the foreign corporation.
• Step 4
  • If the organization owns between 10% and 50%, determine how much of the entity is owned by other US Shareholders (those owning vote or value of 10% or more). This analysis helps determine if the entity was a controlled foreign corporation while the organization owned its interest.
• Step 5
  • Determine if the entity owns an interest in other foreign entities.
• Step 6
  • If you have owned this investment longer than the current tax year, analyze when the investment was made and make determinations as to whether there was a filing obligation in the past as well.

What is the point of all these steps?

The point of these steps is to gather enough information to determine if there is, or should have been, a form 5471 filing obligation.

Step 1 details:

In step 1, the entire list of the alternative investments made by the organization should be reviewed to determine if the entity is US or foreign. The best way to make that determination is to work through your investment consultant or inquire directly with the investment company.

Step 2 details:

In step 2, determining what type of entity will help direct what US tax forms may be required. With respect to form 5471, the entity in question would be a corporation for US tax purposes. There are a few ways to get an indication of the type of entity, but the best way is to inquire of the fund. Sometimes reliance on common sense will result in the wrong answer. For example, the fund may be organized as a limited partnership in the Cayman Islands. It seems clear the entity is a partnership in the Cayman Islands. For Cayman Islands legal (and tax) purposes, that entity is in fact, a partnership. What can’t be determined just by the name of the entity is if the US owner (current or past) has made a check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes. Certain entities are eligible to choose how they will be treated in the US for US income tax purposes, either as an association taxable as a corporation, a partnership, or a disregarded entity. If the owner made the check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes, it should be considered a corporation for determining form 5471 filing obligations.

Inquiry to the fund asking specifically about any check-the-box elections is preferred.

Step 3 details:

At this point the form 5471 determinations can start to be made. Understanding the ownership percentages will allow the owner to determine if they are considered a US Shareholder or not. If the TE and/or NP organization is a US Shareholder then at some point a form 5471 should have been filed with respect to that ownership of the foreign corporation. If the TE and/or NP owns more than 50% of the foreign corporation, there is a clear form 5471 filing obligation for the TE or NPF organization.

Step 4 details:

If the TE and/or NP owns between 10% and 50% of the foreign corporation, certain annual form 5471 filing obligations will be required if the foreign corporation is considered a Controlled Foreign Corporation (CFC). A foreign corporation is a CFC when US Shareholders (US people that own 10% or more) own more than 50% of the foreign corporation. Thus, in the instance a TE and/or NP organization is consider a sub-50% US Shareholder of a foreign corporation, it will need to understand if there are other US Shareholder such that the foreign corporation is considered a CFC in order to determine how to file form 5471.

Step 5 details:

In step five, a determination or inquiry should be made to understand if the foreign corporation owned by the TE and/or NP organization owns an interest in other foreign corporations as subsidiary companies. If so, the TE and/or NP organization may be required to file form 5471 for those lower tier entities as the TE and/or NP organization is deemed to own what its investment owns in proportionate share.

Step 6 details:

Step 6 ensures that the TE and/or NP organization either has or doesn’t have delinquent form 5471 filing obligations.

What happens if a TE and/or NP is required to file form 5471?

If the discovery is made for the current tax year filing and the tax return is still timely and not late, then prepare and file the form 5471. That’s an easy thing to say, but the form 5471 is a relatively complicated form and understanding what needs to be completed on the form should be addressed. Generally, it is best to seek professional advice.

If it is determined that the form 5471 filing should have occurred in a prior year, the prior year return should be amended to attach the form 5471. As discussed earlier, late filed form 5471 is subject to penalty. The penalty may be abated if the failure to file was due to reasonable cause. Work with a qualified professional to determine how best to proceed.

Christopher Stroh, J.D. & LL.M (Taxation)

chris@jmtaxlaw.com

720-784-3296

Christopher has spent the majority of his career focused on the international tax implications for businesses, tax-exempt organizations and individuals who engage in some form of cross-border activity, either knowingly or not!  Christopher advises entities and individuals who need help or advice with the US international tax implications of structuring businesses (US or foreign) or has any sort of non-US activity that may require US tax reporting. In addition to planning and consulting on US international tax items, Christopher helps prepare and advise on all manner of US international tax forms.

Tax season is upon us again, and you may ask yourself if there are benefits of hiring a tax attorney in Denver. This means filing returns, paying taxes, and dealing with any issues that arise along the way. While many try to handle things themselves, doing so can lead to severe consequences. For example, failing to pay your taxes can put you in danger of being audited by the Internal Revenue Service (IRS). If you owe money to the IRS, you might even be charged interest and fines.

As we know, there are many different types of taxes that individuals and businesses must pay every year. From payroll taxes to sales taxes to income taxes, it can become very confusing to figure out how much money you owe each quarter. This is where a tax attorney can help. A tax attorney specializes in assisting companies in navigating the complicated world of taxes. If you have trouble understanding what you need to do to file your taxes correctly, or if you need to resolve a dispute with the government over unpaid taxes, you’ll want to understand the benefits of hiring a tax attorney in Denver.

Additionally, you do not want to pay taxes to the IRS. After all, the government is taking money away from you. A tax lawyer can help you navigate the process of paying off your debts, including allowing you to avoid mistakes that could lead to additional charges.

What Is A Tax Attorney?

Tax attorneys are lawyers who specialize in federal and state income tax laws. A tax attorney must complete four years of college and three years of graduate-level coursework. After completing the requirements, they take the LSAT or the Law School Admission Test. 

Once the state bar exam is completed, a tax attorney works for a law firm specializing in taxes. Their main objective is to help clients file returns correctly and understand how to minimize their tax liability. Below are some of the benefits of hiring a tax attorney in Denver.

Understanding Tax Policies

The tax laws are updated now, and it is almost difficult for ordinary citizens to know what exactly is happening. This is where the benefits of hiring a tax attorney in Denver come into play. They are well-versed in tax policies and update themselves on new tax laws. As such, they can help you understand the current situation and ensure you comply with the law.

Filing Tax Returns

Tax season is here again, and it’s time to start thinking about getting everything done. But how do you know where to turn? You don’t have to worry anymore because your tax lawyer is there to guide you every step of the way. An experienced tax attorney knows the required forms and when they’re due. They’ll also help you determine whether you need to file a return or amend one. And if you need to file a late return, your attorney can prepare the necessary documents to get an extension.

Protect Your Finances and Property

The Internal Revenue Service has several collection options to help people pay back what they owe. One of those options is a wage levy. This allows the IRS to take a portion of your income directly out of your paycheck. Another option is a bank account levy. These are often used against individuals who fail to file returns or pay tax liabilities. However, there are several exceptions to both levies. For example, if you don’t have access to your bank accounts or if you can prove that it isn’t possible to pay off the debt, you won’t be subject to either levy.

If you receive a Notice of Intent to Levy, you have 30 days to respond. You must provide information about how much you owe, whether you can afford to pay, and why you believe you shouldn’t be required to pay. The IRS will consider waiving interest charges if you can’t pay and agree to a payment plan. However, the IRS will begin seizing your wages or bank accounts if you miss payments.

In addition to the above, certain protections are afforded under federal law. For instance, if you lose your job, you cannot be forced to sell your house, car, or other personal property just because you have yet to pay your taxes. Additionally, the IRS cannot garnish Social Security benefits without court approval.

Tax Disputes

If you receive a letter saying that the IRS is auditing your return, it’s essential to act quickly. They are likely looking for errors on your tax return; however, sometimes audits happen because of mistakes someone else made. You might think you did nothing wrong, but if you make a mistake on your taxes, it could cause problems down the road. One of the benefits of hiring a tax attorney in Denver is to help navigate the process and communicate with the IRS, so you don’t end up paying penalties and interest.

It means you’re still in luck if you owe the IRS money. You can reduce the amount owed by filing an Offer in Compromise. However, there are some things you’ll want to know about before applying.

A penalty abatement allows taxpayers to pay less than what they owe while avoiding the payment of interest or late charges. To qualify for a penalty abatement, you must file Form 656, Penalty Abatement Request. This form outlines the information needed to request a penalty abatement. Once submitted, IRS employees review your case and decide whether to approve it.

In addition to filing an OIC, consider paying off your debt early.

Maintain Your Credit

The Internal Revenue Service (IRS) does not report your tax debts to the three major credit reporting agencies—Experian, Equifax, and TransUnion. However, you could face severe consequences if you fail or cannot pay your taxes. A Notice of Federal Tax Liens (NFTL) is filed against you by the IRS. If you do not resolve the issue within 30 days, it becomes a judgment against you. Once recorded, your debt will be reported to the three major credit bureaus—Experian, Equifax, and TransUnion. These reports will remain on your credit history for seven years.

If you enter into a payment arrangement or offer in compromise with your local IRS office, you may avoid having an NFTL placed against you. Sometimes, a lien can be removed early, allowing you to rebuild your credit history sooner. An experienced tax resolution lawyer may be able to negotiate with the IRS to release the lien.

Tax Fraud or Evasion

The IRS has been cracking down on people accused of tax evasion and fraud. In 2017 alone, it charged over 5,500 individuals and businesses with crimes related to failing to pay taxes. This number jumped dramatically from 2016, when there were just 2,700 cases filed. And while the majority of the charges involved failure to file tax forms, there were also some instances of tax fraud.

A lawyer is essential in these cases because they can help you avoid serious consequences. If you refuse to file your taxes, you could face jail time. You could lose your home if you fail to pay what you owe. And if you reveal all your sources of income, you could end up paying hundreds of thousands of dollars in fines.

In addition to the penalties mentioned above, there are also civil consequences. For example, if you don’t file your taxes by April 15th, you could be fined $50 per day. You might also be required to pay interest and penalties on the amount owed.

Protection From Litigation

Businesses are often sued because of negligence. Negligence occurs when someone fails to act reasonably under the circumstances. For example, a business owner could only correctly train employees about safety procedures or provide adequate security measures. Even though businesses do everything possible to avoid lawsuits, some still sue them. When this happens, it is called litigation.

Litigation is expensive and stressful. You might lose your business if you need to learn how to defend yourself. One study found that the average cost of defending against a lawsuit is $1 million. Fortunately, there are ways to protect your business from the litigation without spending too much money.

An experienced tax attorney can help you build strong defenses against negligence claims. They can even draft legal documents, such as insurance policies and employment agreements, to protect your business. Another benefit of hiring a tax attorney in Denver is we can advise you about what types of evidence are most likely to win a case and how to best prepare for trial.

Intermediary Working For You

When dealing with the Internal Revenue Service, many different types of lawyers can help you. Some work directly for you, while others represent clients whose cases intersect with yours. But no matter whom you choose, you want someone who can help you navigate the process, provide advice, and guide you through the steps needed to resolve your issues. Some people call themselves “intermediaries” because they act like middlemen between you and the IRS. They help you understand what’s happening, explain your options, and negotiate resolutions to your problems.

Your intermediary might be a solo practitioner, a small firm, or even a large law firm. And although they won’t necessarily be able to do everything for you, they can offer guidance, assistance, and representation throughout the process.

Let JM Tax Law Provide You With The Most Benefits Of Hiring A Tax Attorney In Denver

The IRS is cracking down on people who owe money to Uncle Sam. They threaten to garnish wages, sue you and even put liens on the property. If you pay up, it could save you everything. But there’s hope. You can still avoid foreclosure, wage garnishment, and bank levies. We’ve helped thousands of clients just like you escape the clutches of the IRS.

At JM Tax Law, we understand how overwhelming this process can be. That’s why we’re here to help. Our team of highly experienced attorneys is ready to take action on your behalf. So call us now at 720-833-7705!

The title of Form 5471 lays it out succinctly, “Information Return of U.S. Persons Concerning Certain Foreign Corporations.” 

It is the form used to report information about a foreign corporation where a US person owns an interest in the said foreign corporation. It sounds simple enough….

A taxpayer or tax practitioner should begin thinking about whether or not a form 5471 is required when a US person (generally an individual, partnership, corporation, or trust) owns an interest in a foreign entity. That is a fair place to get form 5471 on your radar. It won’t always mean the form is required, but it should warrant some investigation.

One of the first determinations is what exactly the taxpayer owns. For Form 5471, you should be looking for the taxpayer to own an interest in a foreign corporation.

What Is A Foreign Corporation?

Foreign Corporations: The Regulations provide that “per se” corporations, as listed in 301-7701-2(b)(8), are corporations as are associations as defined in Tres. Reg. 301-7701-3.

Foreign entities where all members have limited liability are considered, by default, to be associations treated as corporations for US tax law. A member has limited liability when, under the laws of which it is organized, the member has no personal liability for the debts of or claims against the entity because of being a member.

This is an exciting point because a foreign limited liability company, where all members have limited liability, is treated as a corporation for US tax purposes under the default rules. 

This is contrary to how a US-based limited liability company (LLC) is treated for US tax purposes. Often, taxpayers and practitioners assume that foreign limited liability companies are treated as flow-through entities for US tax purposes (as a US LLC is treated). Still, they are not treated that way unless an entity classification election has been made.

Suppose a US person owns an interest in a foreign entity treated as an association for US tax purposes. In that case, that entity defaults to a corporation for US tax purposes.

Once the determination is made on the type of entity owned, the US person needs to determine how much of the entity that person owns.

How Much Of The Foreign Corporation Do You Own?

Ownership of a foreign corporation is determined in three ways:

1. Direct Ownership

2. Indirect Ownership

3. Constructive Ownership

Direct Ownership

As the name implies, the shareholder can own an interest directly. When determining how much of an entity a person owns, the voting interest in the corporation and the value of the corporation’s shares are considered. Generally, the higher percentage of interest is the deemed ownership for determining filing obligations.

Indirect Ownership

Indirect ownership arises when the US person owns an interest in a foreign corporation through the US person’s ownership in another entity. If the US person owns an interest in a partnership or other foreign corporation, that US person may be deemed to own a proportionate share of what that entity owns (see also Constructive ownership).

Again, consideration should be given to voting rights and values of ownership.

Constructive Ownership

There are several instances whereby the US person is deemed to own interests in a foreign corporation because of a related person (or entity) owning an interest in a foreign corporation. These rules can be complicated as they apply the constructive ownership rules under Section 318, with some tweaks. 

The constructive ownership rules broadly say a US person is deemed to own what certain family members own and what certain corporations, partnerships, trusts, and estates own. A formal discussion of 318 is more than this article hopes to present, but at least knowing to look for related party interests can help frame the need to either look more deeply into what the US person owns or to find some help.

A Quick Example Of How The 318 Rules Can Play Out

A US person (individual) owns 2% of a foreign corporation’s voting rights and value. You will see later that a 2% interest does not, on its own, create a filing obligation for form 5471. 

Since you’ve read this article, you know enough to ask who the other owners are. The US person’s non-resident alien (not a US person) father owns 90% of the foreign corporation. After applying the 318 rules, it is deemed that the US person owns 92% of the foreign corporation for specific form 5471 reporting purposes. Several layers of tax law must be applied and considered to get the correct answer.

A point to remember is that sometimes the face of the facts is not enough to make a proper filing determination for form 5471. Be sure to inquire deeper than the surface.

Now that you know a US person owning an interest in a foreign corporation and know how much of that foreign corporation the US person owns, you can apply that information to determine if the 5471 needs to be filed.

Categories of US Persons Who File Form 5471

The form instructions provide that the return must be filed by US persons (US individuals or US entities)

who meet specific ownership amounts or are a director or officer of the foreign corporations. The form instructions outline the ownership requirements provided across several internal revenue code sections, primarily sections 951, 953, 957, 958, 6038, 6046, and 965. The instructions break down the different filing obligations into certain Category filers to determine who has to file form 5471.

Category 1 Filers (Sec. 965)

A Category 1 filer is a US person considered a US Shareholder of a foreign corporation that is a section 965 specified foreign corporations. Effectively that means the taxpayer is a US person who owns 10% or more (vote or value) of a foreign corporation (making the taxpayer a US Shareholder), which is a controlled foreign corporation (discussed later) or the taxpayer is a US person who owns 10% or more of a foreign corporation where a domestic corporation owns 10% or more of the foreign corporation.

Note, that a domestic corporation could mean either a C-Corporation or an S-Corporation. Still, the rules and regulations on this are very unclear for applying the specified foreign corporation rules.

Reminder, if the US person owns less than 50% of the foreign corporation (directly, indirectly, or constructively), you should always check to see if the Category 1 filer rules apply.

Category 2 Filers (Sec. 6046)

A Category 2 filer is a US citizen or resident who is an officer or director of a foreign corporation in which a US person has acquired enough stock to exceed 10% overall ownership or an additional 10% purchase.

When a US citizen or resident is an officer or director of a foreign corporation, and another US person buys enough stock, that US citizen or resident has to file form 5471 to report that other person’s purchase.

Category 3 Filers (Sec. 6046)

A Category 3 filer is a US person who acquires stock in a foreign corporation which either increases the US person’s ownership over 10% of the vote or value of the foreign corporation or adds 10% ownership of the vote or value of the foreign corporation. Additionally, a person who becomes a US person while owning 10% or more of a foreign corporation is a Category 3 filer. 

US persons who dispose of enough stock to drop that person under the 10% ownership threshold are also a Category 3 filer.

Finally, a person treated as a US shareholder of a foreign insurance company is a Category 3 filer.

Here are a few examples of this rule (assuming direct ownership):

US person owns 3% of a foreign corporation. That person purchases an additional 9% of the foreign corporation. In that year, the total ownership went over 10%, thus, that US person is a Category 3 filer that year. 

US person owns 15% of a foreign corporation. Unless that person bought that 15% in the current year, there is no Category 3 filing obligation for that year. BUT, if the US person buys an additional 10% or more during the year, that person would be a Category 3 filer.

In year 1, US persons own 40% of a foreign corporation. That US person disposes of 20% of their interest in year 2, leaving them with a 20% interest. That disposition does not give rise to Category 3 filing obligation. 

In year 3, that US person disposes of an additional 15% of their holdings, bringing their total holdings under 10%. That person is a Category 3 filer in year 3.

Category 4 Filers (6038)

In short, a category 4 filer is a US person who “controls” a foreign corporation. Control means the US person owns (directly, indirectly, or constructively) more than 50% of the vote or value of the foreign corporation at any time during the foreign corporation year.

Referring back to the example in the constructive ownership section, since the US person’s son would be deemed to own 92%, even though he only directly owns 2%, he would be deemed to control the foreign corporation for purposes of  Category 4 and who is required to file form 5471.

Category 5 Filers – Controlled Foreign Corporations (Sections 951, 957, 958, 6038)

If a foreign corporation is considered a controlled foreign corporation (CFC), US persons who are US shareholders are Category 5 filers. A US person is a US shareholder if that person owns 10% or more of the vote or value of the foreign corporation. A foreign corporation is a CFC if US shareholders own more than 50% of the vote or value of the foreign corporation.

Concerning each Category filer, there may be exceptions to the required filing. Careful examination should be made to determine if an exception applies.

A person can fall into multiple categories in any given year.

What Happens If I Don’t File Form 5471 or It Is Late?

The taxpayer that fails to file form 5471 or is late and was required to file the form may be subject to a $10,000 penalty per form per year.

What Other Forms Should I Consider Filing?

Often the requirement to file the form 5471 means there may also be other international forms or elections that should be filed. 

If the taxpayer is filing form 5471, that taxpayer should also look into filing the following forms or elections as well (note, this is not an exhaustive list, just a sample):

Form 8938 – Statement of Specified Foreign Financial Assets Foreign Bank Account Reporting (FBAR)

Form 926 – Return by US Transferor of Property to a Foreign Corporation

Form 8992 – US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)

Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)

Section 962 Election – Election by Individuals to be subject to tax at corporate rates.

Form 8858 – Information Return of U.S. Persons concerning Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).

Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Summary of Form 5471:

The 5471 is a challenging form to file. It can be challenging to determine if you have a filing obligation for form 5471. As a brief summary and something that should get you thinking about form 5471, broadly consider the following:

A taxpayer may have to file form 5471 if the taxpayer is a US person and owns (by voting rights or value).

An interest in a foreign corporation, and that interest exceeds 10% of the voting rights or value of the foreign corporation, or that foreign corporation is an insurance company, and the taxpayer owns any amount, or the taxpayer is a director or an officer of a foreign corporation. A US person has acquired 10% of the stock of a foreign corporation.

This can be an area that can be quite detailed and, at times, difficult just to determine if there is a filing obligation, to say nothing of the actual preparation and filing of the forms. 

Unless you practice in this area, it is likely worthwhile to seek professional advice.

*This article is meant to present a very high-level discussion of filling obligations for Form 5471 and does not present a thorough or complete discussion on the subject. There is a lot of information and rules in this area, which can get quite deep.

Should you have any questions about form 5471 or would like some help with issues around this form, please contact Christopher Stroh, JD, LL.M (Taxation) at The McGuire Law Firm. To speak with our professional Tax Attorneys, call us at 720-833-7705.

Common Use for a Forward Triangular Merger

One standard method used is a forward triangular merger, or as some people refer to it, an indirect merger under Section 368(a)(2)(D) of the Internal Revenue Code. This type of merger is beneficial when a parent corporation is looking to purchase or acquire another entity, known as the target corporation, but is hesitant to inherit any liabilities or other negative aspects of the target. 

In a traditional A reorganization under Section 368(a)(1)(A), the target corporation merges directly with the acquirer. At this point, the acquirer is responsible for all liabilities associated with the target. Therefore, the purchasing corporation may often structure the transaction as a forward triangular merger rather than a traditional A merger by using a subsidiary to protect against any known or unknown liabilities the target may have. A Denver business attorney has prepared the article below to provide additional information on a forward triangular reorganization.

Where Forward Triangular Mergers are Prevalent

Forward triangular mergers are also prevalent where entities plan to use a significant amount of cash, or boot, in the deal.

Unlike reverse triangular mergers, forward triangular mergers have greater flexibility in the amount of boot that may be used in the transaction since the 80% voting requirement does not apply under Section 368(a)(2)(D) for purposes of consideration.

For example, consider Corporation P, which would like to acquire Corporation T. However, Corporation T has a massive liability on its books that Corporation P is hesitant to accept. Corporation P will first set up another entity called a subsidiary. The Corporation T is the target corporation and will then merge into a subsidiary, rather than Corporation P, for consideration provided by Corporation P. The target corporation ceases to exist and thereby liquidates. At this point, the only surviving corporation in the merger is the subsidiary. Thus, the shareholders of Corporation T will ultimately receive the consideration provided by Corporation P. This structuring allows the target’s liabilities to remain isolated within a subsidiary while simultaneously allowing the purchasing corporation to acquire the target, Corporation T. 

Note that even though this may be considered a tax-free reorganization, there may still be tax consequences to the target corporation’s shareholders upon liquidation, depending on the amount and type of consideration used in the transaction (See Internal Revenue Code Section 354).

Three Critical Things to Remember in a Forward Triangular Reorganization

 First, this transaction only qualifies for tax-free treatment if it would have satisfied the requirements of a traditional A reorganization under Section 368(a)(1)(A) had the merger been done directly between the purchasing corporation and the target corporation. This requires evaluating the transaction as if the subsidiary were not used. If the target merged into the purchasing corporation and still satisfied the A reorg requirements, then this would help Section 368(a)(2)(D)(ii). This requires a statutory merger and, even more importantly, continuity of interest requirements.

Second, in Section 368(a)(2)(D) reorganization, no stock of the wholly-owned subsidiary entity may be used as part of the consideration in the transaction. The only stock acquisition of the purchasing corporation, Corporation P in the above example, may be used. However, other reviews from the subsidiary may be provided, such as cash. Suppose the stock of the wholly-owned subsidiary corporation is used. In that case, it will fail the requirements of Section 368(a)(2)(D) and may result in a taxable transaction unless it satisfies another reorganization structure under Section 368.

Finally, according to the treasury regulations under 1.368-2, the purchasing corporation must substantially acquire all of the target’s assets by using the subsidiary.

Forward triangular reorganizations optimize restructuring without facing tax consequences while removing the transfer of a target’s liabilities to a parent corporation. Depending on the type and value of consideration available, a forward triangular reorganization may be the best restructuring tool for your merger.

Key Takeaways

• A forward triangular merger is a form of reorganization that provides a means to avoid the potential tax consequences of acquiring a company with substantial liabilities. It accomplishes this by merging the target with a subsidiary of the acquiring corporation. The target corporation ceases to exist and is liquidated. The sole remaining corporation is the subsidiary.
• The IRS considers a forward triangular merger to be a reorganization because it satisfies the definition of a reorganization found in Section 368(a).
• However, the IRS does not allow a forward triangular merger to qualify as a tax-free reorganizational event unless the following conditions are met:
  • The acquiring company must pay fair market value for the target company’s assets.
  • The target company continues to operate after the acquisition.
  • The acquired company ceases to exist and is liquidated.

You can contact The McGuire Law Firm to discuss your business or tax-related issues with a Denver business attorney or tax attorney. 

Are you considering establishing a corporation? Perhaps you have considered contributing property as consideration for your interest while another member would like to contribute cash. You may even find yourself in a situation where a third person would like to donate his services in exchange for an interest in the corporation. Each of these situations can have significant tax consequences, so you must plan to maximize the benefit of the formation. This article was drafted by a Denver Business Attorney and Denver tax attorney to provide information related to the contribution of a property when you form a corporation.

Features of IRC Section §351 

One of the most attractive features of forming a corporation is in §351 of the tax code. This provision allows persons to contribute property to a corporation without recognizing gain if done correctly. 

Alternatively, §351 may stop some members from recognizing a loss, which may be a negative factor. As a general rule, the exchange of stock for property creates a §1001 event taxable. However, Congress wanted to make a way where taxpayers could still contribute property to a corporation without getting hit with a huge tax liability. This resulted in §351, but this code section does create requirements for it to apply.

Requirements in IRC Section §351 

Many requirements must be met, and the whole transaction may trigger immediate tax consequences if the conditions are not met. Remember that simply contributing property to a corporation does not eliminate the gain nor create a step-up basis, similar to §1014. Instead, the tax consequences will linger in the background until any realized gains or losses must be recognized in the future. 

Section §351 of the Internal Revenue Code applies only to the contribution of property, which does not include services. However, there are exceptions, but you must be careful when creating a corporation with someone who plans to provide any services in their interest. The contribution of services may completely ruin a §351 transaction, depending on the value.

Requirements in IRC Section §368(c)

Under Section §368(c) of the Internal Revenue Code, members must also acquire control of the corporation’s formation. This section requires that the members contributing to the property possess 80% of the voting power and 80% of shares of all other classes of stock issued by the corporation.

Non-Recognition and IRC Section §351

Additionally, the non-recognition portion of Internal Revenue Code Section §351 applies only to situations where the members receive solely stock for their interest. However, in cases where members receive boot, or something other than stock, in exchange for their contribution, they may recognize gain or loss. Receiving something different than stock does not always ruin the §351 transaction entirely, but it may trigger profit or loss, which could defeat the entire purpose of the transaction.

Liabilities and IRC Section §351

Liabilities also create issues with IRC Section §351 transactions where the corporation assumes the debt. It is not uncommon to have machines or other equipment carrying a note or obligation to consider one’s interest. As mentioned above, the courts did not want to discourage taxpayers from transferring property to a corporation simply because a liability encumbered it. Instead, the whole purpose of §351 was to encourage entity formations.

As a general rule, if liabilities are incurred on a property for legitimate business purposes, these will not trigger gain or loss upon formation. Instead, the penalties will be accounted for on the member’s basis in the corporation. However, there is an exception where the liabilities exceed the basis of the property. Under §357(c), there will be gain recognition, but only to the extent that the liabilities exceed the basis.

Forming a corporation can have many benefits, but you must consider all the contributions made before determining the overall tax consequences to the newly formed corporation and its shareholders. 

In Summary

Consider speaking with a Denver business attorney and Denver tax attorney regarding the business and tax implications of forming a corporation and contributing property to the corporation. Planning the contributions in the beginning can help avoid significant tax liability in the future.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. Call us at 720-833-7705 or John@jmtaxlaw.com

Marriage

Several factors may impact your tax bill if you’re planning to get hitched. You’ll need to consider whether you plan to file jointly or separately and what kind of benefits you might qualify for. If you’re filing jointly, you’ll also need to determine whether you’ll claim any dependents and, if so, how many. Finally, you’ll need to assess your income level before deciding whether to file as single or head of household.

Education

School can be expensive, especially if you go to college. But there are ways to get financial aid and reduce those costs. You may qualify for federal grants and loans, and state programs may offer scholarships. There are also tax breaks available to students. For example, you can deduct up $2,500 of tuition and fees from your income when filing your taxes. And if you’re still paying off student loans, you can deduct the interest paid on them.

In addition to tax benefits, there are other perks to obtaining professional certifications. For example, the American Society of Mechanical Engineers (ASME) offers a $1,000 stipend for those pursuing certification through its ASME Certification Program. The National Institute of Standards and Technology (NIST) provides a $2,500 grant for those seeking NIST certification. The American Board of Medical Specialties (ABMS) offers a $5,000 stipend for pursuing ABMS certification. And the National Association of Realtors (NAR) offers a $10,000 grant for real estate agents pursuing NAR certification.

Having a Child

A baby can help you save money. You can claim several tax credits when you have a baby, including a child tax credit and a dependent care credit. These credits will lower your taxable income and make you pay fewer taxes. A baby can also give you access to other benefits like the EITC.

A Job Promotion or Change

A work raise is an increase in salary that comes with a corresponding tax decrease. If you get a raise at work, you could pay higher taxes if you’re already in a high-income bracket. You should check the IRS withholding calculator to see your current rate after getting a raise. Then, you can update your W-4 form to reflect your new number.

Purchasing or Selling a Home

If you buy a home, you can deduct all kinds of expenses when selling it. If you file jointly, you can also get tax breaks on up to $500k in capital gains.

Becoming a Widow or Widower

If you die in 2022, your representative will need to file a final tax report in your name, just like if you were still alive. If you have a surviving spouse, then your spouse can file a joint tax return for that year. Depending on the size of your assets, an inheritance tax return may also need filing. After the estate assets are distributed, it becomes the responsibility of your beneficiaries to file their tax reports that include any inherited assets.

At McGuire Law Firm, we aim to provide the best experience possible when you file your taxes. That means asking you enough questions to start and then helping you complete your return. 

Gaining an inheritance

Inherited funds are not subject to taxes when distributed to beneficiaries. However, if you inherit real estate, you may owe capital gains tax on any appreciation in its value since the decedent’s death. You also may need to pay additional taxes on any increase in the cost basis of the inherited property.

McGuire Law Firm provides IRS representation and tax law services. Contact us today for your legal tax needs and to speak with a Denver tax attorney or Denver business attorney.