Include in Your Individual Tax Organizers Questions Regarding Foreign Corporations and Foreign Bank Accounts
As you are customizing your tax software tax organizers for individual clients for the upcoming filing season, we suggest you include the following questions about foreign corporations and foreign bank accounts.
Do you own, directly, OR INDIRECTLY, more than 10 percent of a foreign corporation?
Are you an officer or director of a foreign corporation?
Did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, retirement account or other financial account?
If yes, did the aggregate amount in your foreign financial account(s) exceed $10,000 at any time during the year?
Regarding Foreign Corporations: We note that direct and indirect ownership of foreign corporations and being is a director and/or officer in any foreign corporations can trigger Form 5471 filing requirements. IRS has announced that starting January 1, 2009, there may be possible automatic $10,000 penalties for late or inaccurate Form 5471s (see related Form 5471 Penalties e-alert item).
Indirect ownership of a foreign corporation exists when an individual owns 10 percent or more of a US company that owns 100 percent of a foreign subsidiary, which is quite common. A 10 percent or greater US shareholder of such a US company has a Form 5471 filing requirement via indirect ownership.
We note that the Form 5471 filing requirement for the individual can be met by the US company if the Form 5471 filed by the US company discloses the US shareholder's information on page one, Section D. However, the individual must attach a statement to his or her 1040 that states that the Form 5471 is filed with the US company's income tax return.
Regarding Foreign Bank Accounts: We note that there has been increased Congressional and IRS oversight over foreign bank account reporting and very high penalties. The TD F 90-22.1 form is required to be filed by U.S. citizens and residents (including an individual, corporation, partnership, trust or estate) who have a financial interest in or signature or other authority over any financial accounts (including bank, securities, mutual funds or other types of financial accounts in a foreign country), if the aggregate value of such accounts exceeded $10,000 at any time during 2008. (see related FBAR Update e-alert item.)