Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues


Exchange Rates for 2023

2024-01-09

Image of Schedule H, Lines 5d and 5e

Last Friday the IRS published average currency exchange rates for 2023. These average rates are used:

  • On Schedules H and M of Form 5471,
  • To convert local currency Subpart F Income and GILTI tested income amounts into U.S. dollars. Code §989(b)(3), and
  • To convert GILTI inclusion amounts back into the functional currency of the CFCs. See Form 8992, Schedule A, Column (l) and Treas. Reg. §1.951A-5(b)(3).

I also use these average rates to convert from local currency to U.S. dollars on Schedule C (Income Statement) of Form 5471.

The Treasury Department has also published year-end currency exchange rates for 2023. These year-end exchange rates are used:

  • On Form 8938, and
  • On the FBAR.

I also use these year-end rates to convert from local currency to U.S. dollars on Schedule F (Balance Sheet) of Form 5471. For example, I use the December 31, 2022 year-end rate to convert the 2023 beginning of the year balance sheet and the December 31, 2023 year-end rate to convert the 2023 end of the year balance sheet. You can access the year-end exchange rates from our exchange rates page.

Tags: Form 5471, Form 8938, Other - FBAR, Form 8992

Exchange Rates for 2022

2023-01-25

Schedule H

Yesterday the IRS published average currency exchange rates for 2022. These average rates are used on Schedules H and M of Form 5471. In addition, the average exchange rates are used to convert local currency Subpart F Income and GILTI tested income amounts into U.S. dollars. Code §989(b)(3).

The average exchange rates are also used to convert GILTI inclusion amounts back into the functional currency of the CFCs. See Form 8992, Schedule A, Column (l) and Treas. Reg. §1.951A-5(b)(3).

The Treasury Department has also published year-end currency exchange rates for 2022. These year-end exchange rates are used on Form 8938 and the FBAR.

Tags: Form 5471, Form 8938, Other - FBAR

Reviewing Form 5471

2022-09-09

When I review a Form 5471, I look for many different things.  I created a chart that describes some of the high-level things I look for with respect to each schedule on Form 5471.  The chart can be found here.

Tags: Form 5471

New IRS Practice Unit - IRC 958 Rules for Determining Stock Ownership

2022-08-30

Yesterday the IRS published a new practice unit titled “IRC 958 Rules for Determining Stock Ownership.”

The direct and indirect ownership rules in Code §958 are important for purposes of determining, among other things:

  1. Whether a U.S. person is a U.S. shareholder of a foreign corporation (Code § 951(b)),
  2. Whether a foreign corporation is a controlled foreign corporation, (“CFC”) (Code § 957(a)),
  3. Whether a person is related to a CFC (Code §954(d)(3)), and
  4. Whether the U.S. person is required to file Form 5471 as a Category 4 or 5 filer (Code §6038).

The practice unit discusses the downward attribution rules and the repeal of Code §958(b)(4).  The practice unit includes 16 examples with structure charts showing how the ownership attribution rules work.

This new practice unit has been added to our Practice Units By Topic page.

Tags: 958 Direct & Indirect O'ship Rules, Form 5471

New Form 5471, Schedule J Video

2021-12-03

Today we published a new video on YouTube which discusses Schedule J of Form 5471.  The video can be found here.

Tags: Form 5471, Other - Videos

Video - Downward Attribution Form 5471

2020-01-09

Today we uploaded a video discussing downward attribution and filing Form 5471. The video is shown below.

Tags: 318 Attribution, Form 5471, Other - Videos

New & Updated Draft International Forms

2018-10-19

The IRS has published new and updated draft forms. Some of these forms include:

Tags: Form 5471

Video - Form 5471 Attribution from NRA Spouses

2018-03-09

We have published a video that discusses Form 5471 Category 4 Filer and Category 5 Filer requirements where a U.S. citizen and his nonresident alien spouse own shares in a foreign corporation. The video can be viewed at our Youtube channel.

Tags: Form 5471, Other - Videos

New Flowchart – Form 5471 Filing Requirements

2017-11-13

Today we published a flowchart on our sister website, Tax-Charts.com, regarding Form 5471 filing requirements.  There are 17 free flowcharts at Tax-Charts.com.

The new Form 5471 flowchart assists in the determination of whether a U.S. person needs to file a Form 5471 as a Category 2, 3, 4, and/or 5 filer.  The flowchart also addresses the attribution rules relevant to each category, as well as the applicable exceptions to the filing requirements.

Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to satisfy the reporting requirements of Code §§6038 and 6046, and the related regulations.

Tags: Charts - Flowcharts, Form 5471

5 New Tax Charts

2017-06-02

Today we added 5 new situational charts to andrewmitchel.com (listed in topical order).  View these charts and hundreds of other free charts at andrewmitchel.com (listed in alpha-numeric order).

  • Inverworld (Cayman Island Company Was Engaged in a U.S. Trade or Business and Had U.S. ECI)
  • Rev. Rul. 66-86 (Section 2036 Does Not Apply to Life Interest In Trust For Inherited Usufruct)
  • Reg. 1.957-1(c), Example 8 (>50% Ownership of Value & At Least 10% of Vote Makes a CFC)
  • Reg. 1.957-1(c), Example 9 (>50% Ownership of Value (Thru Publicly Traded Co.) & At Least 10% of Vote Makes a CFC)
  • Reg. 1.6046-1(i)(2), Example (Form 5471: Category 3 Filer, No Re-Application of Family Attribution)

957_1c_ex8

Tags: 957 Controlled Foreign Corporation, Charts - Situational Charts, Form 5471

New Videos - June 2016

2016-06-30

Tags: 331/332 Liquidations, 351 Exchanges, Authority - Revenue Rulings, Charts - Situational Charts, Form 5471, Form 5472, Other - Videos

New Videos - May 2016

2016-05-31

Tags: 301 Distributions, 351 Exchanges, 368 Corporate Reorgs, 988 Transactions, Charts - Situational Charts, Form 5471, Form 926, Other - Videos

The Escalation of Offshore Penalties Over the Last 20 Years

2015-11-02

Increase in U.S. tax form penalties

Over the past twenty years, the U.S. has significantly increased the penalties associated with failing to report certain foreign-related transactions, and it has created new filing requirements that have their own associated penalties. The increase in penalties has occurred for tax return filing requirements as well for the FBAR (FinCEN Form 114, formerly TD F 90-22.1).

The chart above (PDF) shows the penalties that an individual could be subject to in selected years if the taxpayer fails to file certain tax forms and the FBAR.

We have created a simple scenario that illustrates the escalation of penalties:

  • A non-U.S. citizen individual became a U.S. tax resident in July during the year.
  • In September of the year prior to becoming a U.S. resident, the individual formed a foreign grantor trust and contributed $25,000 to the foreign trust. The foreign trust holds the $25,000 in one bank account.
  • The individual owned 100% of a foreign corporation.
  • The individual owned 51% of a foreign partnership.

In the individual’s first year of U.S. tax residency, the individual fails to file certain forms (such as the FBAR, Forms 3520, 3520-A, 5471, 8865, 8938), but does not have reasonable cause for failing to file the forms. The taxpayer did not willfully fail to file the FBAR.

In 1995, the individual was only required to file two forms (the FBAR and Form 5471) and would be subject to penalties totaling $2,000. In 2011, the same individual was required to file six forms (the FBAR, Forms 3520, 3520-A, 5471, 8865, 8938) and would be subject to penalties totaling $70,000.

A Brief History of the Penalty Increases

In 1995, the individual’s failure to file Form 5471 could result in two $1,000 penalties (failure to report becoming a U.S. person while owning at least 5% of a foreign corporation [the threshold became 10% in 1998] and failure to report control of a foreign corporation).

The increases in penalties include:

  • Starting in 1996, the transfer to the foreign trust made in the year preceding U.S. residency is deemed to have been made on the day the individual became a U.S. person (rather than prior to U.S. residency). See Code §679(a)(4). The unreported transfer to the foreign trust could result in a penalty of 5% of the amount transferred to the trust, but such penalty was capped at $1,000.
  • Starting in 1996, a penalty of 5% of the value of the trust could be imposed for failing to report a U.S. owner of a foreign trust.
  • Starting in 1996, the penalty for unreported transfers to foreign trusts was increased to 35% of the unreported amount. In the case of $25,000 being transferred to a foreign trust, the penalty would be $8,750.
  • Starting in 1998, a penalty of $10,000 could be imposed for failing to file Form 8865 with respect to a controlled foreign partnership.
  • Starting in 1998, the two penalties for failing to file Form 5471 were each increased to $10,000.
  • Starting in 2005, a penalty of $10,000 could be imposed for non-willfully failing to file the FBAR.
  • Starting in 2010, the penalty for failing to report a U.S. owner of a foreign trust increased to the greater of $10,000 or 5% of the value of the trust.
  • Starting in 2010, the penalty for unreported transfers to foreign trusts was increased to the greater of $10,000 or 35% of the amount transferred to the foreign trust.
  • Starting in 2011, a penalty of $10,000 could be imposed for failing to report foreign financial assets on Form 8938.

The increasing burden of U.S. tax compliance and increasing cost of non-compliance over the past twenty years is likely contributing to the increased incidence of expatriation.

Tags: 877A Individual Expatriation, Form 3520 / 3520-A, Form 5471, Form 8865, Form 8938, Other - FBAR

International PLRs of Note for the 32nd week of 2014

2014-08-14

Last week the IRS published the following Private Letter Ruling and Chief Counsel Advice relating to international taxation.

PLR 201432002 - A newly formed foreign corporation was not a surrogate foreign corporation (i.e., there was no inversion) under Code §7874 where it acquired a U.S. corporation from a foreign corporation in a Code §368(a)(1)(F) reorganization that was followed by a private placement and an IPO.  The shares of the new foreign corporation were excluded from the numerator and the denominator of the ownership fraction (under the "internal group restructuring" exception) and the private placement and IPO shares were excluded from the denominator (under the "anti-stuffing" rules).  This produced an ownership fraction of zero over zero.  The ownership requirement was not met and there was no surrogate foreign corporation. 

CCA 201432020 - Failure to file a Form 5471 keeps the period of limitations for assessment of tax open for the entire tax return. 

For a discussion of the statute of limitations and international reporting requirements, see our post here.

Tags: 368 Corporate Reorgs, 6501 Statute of Limitations, 7874 Corporate Inversions, Authority - PLRs / CCAs, Form 5471

International PLRs for the 10th week of 2014

2014-03-13

Last Friday the IRS published the following Private Letter Ruling and Generic Legal Advice Memorandum relating to international taxation.

PLR 201410012 - Contracts issued to U.S. persons by a foreign life insurance company that had elected to be treated as a domestic corporation under Code §953(d) were considered "variable contracts" within the meaning of Code §817(d).  The accounts were treated as accounts that are segregated from the general asset accounts of the company “pursuant to State law or regulation,” even though it was under foreign law that the assets were segregated from the general assets of the company.

AM2014-002 - A foreign corporation made an election under §953(d) to be treated as a domestic corporation.  During an examination, the IRS concluded that the foreign corporation would not qualify as an insurance company if it were a domestic corporation.  As a result, the Code §953(d) election was invalid, and the foreign corporation was a controlled foreign corporation ("CFC"). 

Because the foreign corporation was a CFC, Form 5471 had to be filed by its U.S. shareholders.  The form was not filed, so the period of limitation for assessment of tax remained open and would continue to be open until three years after the Form 5471 was filed.  Code §6501(c)(8).  The Form 5471 filing obligations were not satisfied by the CFC's filing of Form 1120-PC.

As described earlier, this post may exclude PLRs dealing with typical international related elections.

There were no international PLRs of note for the 9th week of 2014.

Tags: 953(d) Dom. Election for Fgn. Ins. Co., Authority - PLRs / CCAs, Form 5471

Statute of Limitations for Foreign-Related Items

2014-02-18

Taxes are generally required to be assessed by the I.R.S. within three years after a taxpayer’s return is filed.  Code §6501(a).  In the case of a false or fraudulent return filed with the intent to evade tax, or if the taxpayer fails to file a required return, the tax may be assessed at any time.  Code §6501(c)(1), (2), and (3).

Code §6501(c)(8) provides an exception to the three-year period of limitations due to failures to provide information about cross-border transactions or foreign assets.  Under this exception, the limitation period for assessment of tax does not expire until three years after the required information is provided to the I.R.S.  The disclosure forms relevant to Code §6501(c)(8) include:

  • Form 8621
  • Code §1298(f), regarding certain passive foreign investment companies (“PFICs”)
  • Form 5471
  • Code §§6038 and 6046, regarding certain foreign corporations
  • Form 8865
  • Code §§6038 and 6046A, regarding certain foreign partnerships
  • Form 8858
  • Code §6038, regarding certain foreign disregarded entities
  • Form 5472
  • Code §6038A, regarding certain 25% foreign-owned U.S. corporations and certain foreign corporations engaged in a U.S. trade or business
  • Form 926
  • Code §6038B, regarding certain transfers of property to foreign corporations
  • Form 8938
  • Code §6038D, regarding certain foreign financial assets held by individuals
  • Form 3520-A
  • Code §6048, regarding certain foreign trusts with U.S. owners

If the taxpayer does not have reasonable cause for the failure to provide the information required by these forms, the suspension of the limitations period applies to all issues with respect to the income tax return.  If the taxpayer can establish reasonable cause, the limitations period is suspended only for the item or items related to the failure to disclose.

Not only can the failure to file the necessary forms result in an exception to the three-year period of limitations, but omission of income from the tax return can extend the statute of limitations to six years after the tax return was filed.  For example, if more than 25% of a taxpayer’s gross income is omitted from the tax return, the statute of limitations is extended to six years.  Code §6501(e)(1)(A)(i).  The courts have held that if the taxpayer omits the requisite amount of gross income from his return, the taxpayer’s entire tax liability for the particular taxable year is subject to the six year limitations period.  Colestock v. Commr., 102 T.C. 380 (1994).

The statute of limitations is also extended to six years if an individual omits from income an amount attributable to foreign financial assets that must be reported on Form 8938.  Code §6501(e)(1)(A)(ii).

A less well known rule that also extends the statute of limitations to six years is when a taxpayer owns at least 10% of the voting shares of a controlled foreign corporation (“CFC”) and the taxpayer omits from his gross income certain deemed inclusions known as “Subpart F Income” or certain “investments in U.S. property.” Code §6501(e)(1)(C).  Subpart F Income is generally income earned by a CFC that is deemed distributed to its 10% U.S. owners.  Code §951(a), et. seq.  An investment in U.S. property generally occurs when a CFC invests in certain U.S. assets or makes loans to certain U.S. persons.  Code §956.

Applying the same logic as the Tax Court did in Colestock, supra, it appears that the omission of Subpart F Income or the omission of an investment in U.S. property would cause the statute of limitations to be open for all issues with respect to the income tax return, and not only with respect to the item of income that was omitted.

There is no minimum amount of a deemed inclusion that must be omitted to extend the statute of limitation to six years.  Even if one dollar of Subpart F Income were omitted from a tax return, it appears that the statute of limitations to assess tax for the entire tax return would remain open for six years.

It is possible that this rule could be used by the I.R.S. as a sword against large multinational corporations (“MNCs”) that have many CFCs.  For example, say a large MNC with 500 CFCs files its 2009 tax return on March 15, 2010, reporting what it believed to be the proper amount of Subpart F Income on the tax return.  The three year statute of limitations on assessment would generally expire on March 15, 2013.  If, in 2014, an I.R.S. revenue agent discovers an adjustment that he or she would like to make to the MNC’s 2009 tax return, but the adjustment is not attributable to one of the items that would extend the statute of limitations to six years, the revenue agent may search for any missing Subpart F income for 2009.  Even if a small amount of unreported Subpart F income could be found, it appears that the statute of limitations for all items on the tax return would be extended to six years.

The extension of the statute of limitations to six years would even appear to apply in cases where the MNC voluntarily admits to the I.R.S. that it had unreported Subpart F Income.

Tags: 6501 Statute of Limitations, Form 3520 / 3520-A, Form 5471, Form 5472, Form 8621, Form 8858, Form 8865, Form 8938, Form 926

International PLRs for the 2nd week of 2014

2014-01-12

Last Friday the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation.

PLR 201402001 - Application of the "matching rule" of Treas. Reg. §1.1502-13(c) intercompany gain within a consolidated group. 

CCA 201402003 - In an OVDI context, the CCA held that there was no extension of the statute of limitations under section 6511 on issuing refunds where the I.R.S. received the taxpayer’s statutory extension (Form 872) prior to the expiration of the assessment period, but the I.R.S. failed to execute the Form 872 prior to the expiration of the assessment period. After the assessment period expired, the taxpayer filed a claim for refund.

CCA 201402010 - Failure to file a Form 3520 after receiving a large gift from a foreign person will cause the statute of limitations to remain open.  Failure to file Form 5471, if due to willful neglect, will also keep the statute of limitation on assessment of income tax open.  Code §§6501(c)(3) and 6501(c)(8).

CCA 201402013 - Failure to file Forms 3520-A and 5471 will keep the statute of limitations open, and it can be extended by filing a Form 872.  Code §6501(c)(8).

PLR 201402016 - Revocation of Code §501(c)(3) exemption for a domestic organization that sent funds overseas to its founder's family and failed to exercise expenditure responsibility over the funds.

As described earlier, this post may exclude PLRs dealing with typical international related elections.

Tags: Authority - PLRs / CCAs, Form 3520 / 3520-A, Form 5471

Form 5471, Schedule J Video

2013-12-07

Today we published a video discussing Schedule J of Form 5471. Schedule J tracks the earnings and profits of controlled foreign corporations.  I forgot to mention in the video that the schedule is completed in local currency and not in U.S. dollars.

Tags: Form 5471, Other - Videos

Form 5471 Videos

2013-01-25

Today we published two videos discussing Form 5471, Information Return of U.S. Person With Respect to Certain Foreign Corporations. The first video discusses page 1 of Form 5471 and it is about 7 minutes long. The second video discusses pages 2 - 4 of Form 5471 and it is about 10 minutes long.

Form 5471, Page 1

Form 5471, Pages 2 - 4

Tags: Form 5471, Other - Videos

International PLRs / CCAs of the 6th week of 2012

2012-02-12

This past week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation:

PLR 201206003: A CFC’s income from sales to related parties was not foreign base company sales income (“FBCSI”) under the same country manufacturing exception of Code §954(d)(1)(A).  The CFC was incorporated in Country 1 and the products were partly manufactured in Country 1 by an unrelated party.

PLR 201206010: Extension of time granted to file a Code §338(g) election for the qualified stock purchase of a foreign corporation by a foreign corporation.

PLR 201206012: Late entity classification election for foreign entity to be treated as an association taxable as a corporation.  “Form 8832 * * * was inadvertently not timely filed.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

PLR 201206013: Late entity classification election for foreign entity to be treated as disregarded entity.  “may have inadvertently failed to timely file Form 8832.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

CCA 201206014: Application of the statute of limitations (Code §6501(c)(8)) to an S corporation and certain of its shareholders.  After the HIRE Act, the entire tax return stays open and not just items related to the 5471.  Both the S corporation and 2 of its shareholders were required to file 5471s.

PLR 201206015: Income earned by a regulated investment company (RIC) from the ownership of a wholly owned subsidiary that is a controlled foreign corporation constitutes qualifying income, whether or not attributable to subpart F income, for purposes of Code §851(b)(2).

Tags: 338 Elections, 951 Subpart F Income, 7701-3 Check-the-Box Elections, Authority - PLRs / CCAs, Form 5471, Form 8832

International Aspects of Mitt Romney’s 2010 Tax Return

2012-01-27

Mitt Romney’s 2010 tax return had a number of international related items.  First, he has an interest in, or signature authority over, one or more financial accounts in Switzerland.  See Question 7 on Schedule B.  Presumably, he also filed an FBAR for the Swiss account(s).

Second, he had passive gross foreign source income of $1,525,982, with current year foreign income taxes paid on this income of $67,173.  He also had $81,461 of a carryforward of passive foreign taxes from prior years, and he will carry forward $18,397 of passive foreign tax credits to 2011.  He had an alternative minimum tax credit in the passive basket of of $77,565.  See Forms 1116.

Although he had no general category foreign source income for 2010, he paid $690 of foreign taxes in the general category for 2010, and he carried forward $100,010 of foreign tax credits in the general category to 2010.  His carry forward of general category foreign tax credits to 2011 will be $100,700.

Third, he filed Forms 8621 for seventeen passive foreign investment companies ("PFICs").  Four of these forms he made mark-to-market elections.  Ten of the forms made qualified electing fund (“QEF”) elections.  For one of the forms he appears to have made a QEF election in a prior year.  Lastly, two of the forms related to Code §1291 funds.

Fourth, he filed a Form 8865 to reflect that he had contributed $172,109 to a Cayman Islands limited partnership.

Fifth, he filed Form 5471 to disclose his wholly owned Bermuda investment holding company.  The company had a nominal deficit in current earnings during 2010 and reflected previously taxed income from prior Subpart F Income inclusions of $13,366.

Sixth, he filed two Forms 926 to disclose cash contributions to two Irish corporations.  One of the transfers was for $1,523,419 and the other was for $139,625.  Both contributions were non-taxable Code §351 exchanges.

Tags: 1291 PFICs, Form 1116, Form 5471, Form 8621, Form 8865, Form 926, Other - FBAR