The enactment of the 2017 Tax Cuts and Jobs Act (TCJA)) brought significant changes to the international tax world for U.S. taxpayer including, among other provisions, an expanded definition of a “United States shareholder”, the repatriation tax of IRC §965 and the global low tax intangible income (GILTI) under IRC §951A. We have discussed these provisions in earlier Tax Tips.
As many non-resident U.S. taxpayers are now filing their 2018 U.S. personal tax returns (due October 15, 2018 on extension) many are seeing, for the first time, new Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”. What becomes clear, once more, is that the U.S. Congress did not consider the impact on United States citizens living abroad. The new form is clearly aimed at the large U.S. multi-national enterprises (MNE) who have both the expertise and resources to accurately complete these forms.
One IRS estimate states that it takes, on average, 38 hours to prepare Form 5471, 82.5 hours to do the appropriate book and record keeping and 16 hours to learn about the Form. Someone who has little or no experience with U.S. international compliance will spend significantly more time. If the financial statements have been prepared by a professional accountant we are still looking at an average estimate of 38 hours just to prepare the Form! Using an estimated hourly rate of $200 per hour (which is probably on the lower side given the expertise that is needed) we are looking at a potential fee of approximately $7,500 to complete each Form 5471. One thing is for certain, compliance fees will be going up. Increasing compliance costs are a factor that many U.S. citizens, abroad, are considering when determining whether they want to renounce their U.S. citizenship.
The IRS may impose a penalty of US $10,000 on a late filed or INCOMPLETE form. As such taxpayers cannot ignore this form or take a light hearted approach to complete it. In the past the IRS would not have, automatically, imposed a late filing penalty on individual United States shareholders. This, however, may be changing. The Large Business and International (LB&I) division of the IRS has a number of programs in place (https://www.irs.gov/businesses/full-list-of-lb-large-business-and-international-campaigns) and foreign compliance, in general, is on their target list.
Some significant changes include
- A new classification for a Category 1 filer. There are now 5 (again) classifications of filers.
- Schedule B, Part II is new
- Schedule C, line 8a and 8b are new. These lines report foreign currency transaction gain or loss
- Schedules E and H are now separate schedules.
- Schedule E has been greatly expanded.
- An expanded Schedule G – Other information – may additional questions have been included.
- Schedule I-1 is new. This schedule is used to report information with respect to GILTI
- An expanded Schedule J
- Schedule M has new lines, and
- New Schedule P
Schedules E, H, I-1, J and P must be completed separately for each applicable category of income. For example schedule E-1 has 13 different columns for the tracking of taxes, 9 columns alone for “Taxes related to previously taxed E&P”. The same level of detail is required for Schedule H, “Current Earnings and Profits”, Schedule J, “Accumulated Earnings and Profits (E&P) of Controlled Foreign Corporation” and Schedule P, “Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations”.
Schedule I-1, “Information for Global Intangible Low-Taxed Income” is almost a duplicate of new Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income”.
What is abundantly clear is that the level of compliance complexity has dramatically increased. Smaller, less sophisticated taxpayers are going to have a difficult time complying or are going to have to incur additional compliance costs.
Congress and the IRS really need to consider the impacts on taxpayers other than the Apples, Starbucks and Amazons of this world.
Cadesky U.S. Tax is a full service advisory and compliance firm. We monitor U.S. tax news that may be of interest to our readers and share our thoughts in U.S. Tax Tips. If you require our assistance please do not hesitate to reach out to us.