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WHY SOMEONE HAS TO FILE FORM 5471
Having a controlling interest in
a foreign corporation is only one reason why a U.S. person would have to file Form 5471. There are four active categories of filers.
CATEGORY 1 FILER:
Category 1 was removed in 2004.
CATEGORY 2 FILER:
A U.S. citizen or resident who is an officer or director of a foreign corporation that has at least one U.S.-person shareholder with a stake of 10% or more.
CATEGORY 3 FILER:
A U.S. person who owns 10% or more of a foreign corporation. This category can also include “a U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the [10%] stock ownership requirement,” says the IRS.
Note: there are different def- initions of “U.S. person” that apply to different filer categor- ies. For Category 2 and 3, the definition of a U.S. person is a:
› U.S. citizen or resident;
› domestic partnership;
› domestic corporation; or › domestic estate or trust.
CATEGORY 4 FILER:
A U.S. person who owns or con- trols more than 50% of a foreign corporation. This is the category Svetlana’s in. For Category 4, a U.S. person is a:
› U.S. citizen or resident; › nonresident alien (e.g., a Canadian-only citizen
living in Canada) who elects to be treated as
a U.S. resident to allow joint filing with his or her U.S.-citizen spouse (See AER Mid-October 2014, “Advising same-sex couples with U.S. ties,” advisor.ca/us-ties);
› domestic partnership;
› domestic corporation; or › domestic estate or trust.
CATEGORY 5 FILER:
A U.S. shareholder in a foreign- controlled corporation. (The definition of “U.S. person” for Category 5 is essentially the same as for Category 2 and Category 3.)
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If the roles were reversed and the higher- earning Svetlana was a Canadian-only citizen and Matvei a U.S. person, they would in most cases be able to income split.
The IRS normally has no jurisdiction over the income of a non-resident alien, and the extra income would appear on Matvei’s U.S. return. The ambiguity arises in cases like Svetlana’s, where a U.S. person is the higher-earning spouse who wants to split income with a non-U.S. per- son. Banach notes income splitting is essentially Canada’s answer to the tax breaks U.S. couples get through joint filing.
And while Banach knows U.S.-certified accountants who wouldn’t income split for people like Svetlana, she says there’s no rule specifically stating it’s not allowed. “The law in this area
is unclear.”
The solution
Here’s what Banach and Chang suggest Svetlana should do:
Issues #1 and #2:
IRS Form 5471 and Subpart F income
She should take advantage of the IRS’s Stream- lined Program. It offers leniency to taxpayers whose non-compliance wasn’t willful (see “IRS streamlines its Streamlined Program,” AER October 2014).
This involves back-filing three years of Form 5471, which must be attached to an amended income tax return (Form 1040X). Svetlana also has to certify she’s submitted her FBARs, and provide an explanation of her previous non-
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