Why IRS Form 5471 preparation has become even MORE difficult

Why IRS Form 5471 preparation has become even MORE difficult

Previous video on Downward Attribution: https://youtu.be/dIwYRSo3mHw The Tax Cuts and Jobs act of 2017, otherwise known as tax reform, created many changes to the taxation and reporting of foreign stock ownership. And not for the better. Nowhere is this better demonstrated than on IRS Form 5471, a form with the easy to remember title of “Information Return of U.S. Persons With Respect to Certain Foreign Corporations."  In this video we will discuss some of the worst changes we’ve seen for tax years 2018 and moving forward. Here’s the big message: More people are now required to file a Form 5471, and Form 5471 has never been as complicated.  So let’s get into some of the big changes.  First off, there used to be a requirement that you had to own a stock for 30 days or more to trigger the status as a  US shareholder. Now the trigger is if you own the stock for any moment within a year. Even a second.  Second, there are now increased filing requirements because of new rules that attribute more stock ownership than actually exists - both individuals and entities can be affected. Tax reform repealed Section 958(b)(4)  - and perhaps this was an accident - I really think it was. But the effect has been to require more taxpayers to file a Form 5471 than ever before with a concept called downward attribution - a topic I discussed at length in a previous video - you’ll find the link in the description below.   While there is new program the IRS announced that offers some attribution relief, you need to check to see if it applies in your situation. Follow the links to irsmedic.com if this is something you need help with. Form 5471 now has new schedules and new definitions of certain categories - and don’t forget the attribution rules can differ category to category. Additionally Form 5471 isn’t just for information only anymore - in some cases you now use it to calculate a tax liability.  Another change - you  probably are not done with just a Form 5471. Also look to see if forms 965, 965-A 965 B, 8990, 8991, 8902, 8993 are needed.  And don’t forget about Form 926 - which has been around for a while - but it too has a  $10,000 penalty if not filed or if it is something that the IRS deems is substantially incomplete.   And lastly, Category 1 is back. If you look at the the general wording, it makes it seem like you only have to file if you have a transition tax due. But this is not true. Category 1 is related to the transition tax but again, even if you don’t have any transition tax due, you still could  a Category 1 filer.  Overall, Form 5471 preparation has gotten so complicated many very talented tax professionals have given up and are now outsourcing this work to firms like ours. They simply don’t feel comfortable - with good reason. And also, we are hearing from our clients and other tax professionals alike that many large accounting firms that used to prepare Form 5471 don’t want to be bothered - the work has gotten too difficult for them.  So does this situation seem impossible? Well there is hope. Understand that the IRS does not have the staff to examine every Form 5471 filed. This is some of the most difficult tax work around and there’s simply not enough people in the world who are up to the challenge - inside or outside the IRS. But what the IRS can do, is find easy to spot mistakes - so that’s exactly what they do. They find the low hanging fruit where they can assess those $10,000 penalties nearly automatically. The IRS doesn’t want to have to dig too deep. So the key with Form 5471 is to make sure that what you file can escape that first round of scrutiny with no problems - let the IRS focus on someone who took shortcuts, and not you or your client, right?  So what are your questions about Form 5471? What are your trouble spots? What do you want to know? Please leave your concerns below. We read every comment.  Parent & Parent LLP 144 South Main Street Wallingford, CT 06492 (203) 269-6699 info@irsmedic.com https://youtu.be/hlKiO0nAFEg IRS Medic