Late is not always bad especially with some IRS tax return. Of course, some such as the Foreign Bank Account Reporting (FBAR) is a disaster. The penalties are huge if you are late.
Other forms the penalty is not huge or they can be waived if you are not willful. In any event, if you are reading this blog and your Form 5471 is late, then you will find a blessing in disguise on this page.
The most important tax return for every business is the first year return. We call this the “initial return”. Your tax accounting methods are made on this return. Smart international tax planners attached a statement of all of the tax accounting methods used by their client.
By the way, advance international tax planning strategies are always tax accounting methods.
Boring as watching grass grow, cross-border tax accounting has a plan for every type of transaction. Yep, every type. For example, advance payments for products may allow a tax deferral that can last indefinitely. The result is legal tax avoidance.
If you manufacture, tax cost accounting elections can reduce your taxable gross profits indefinitely.
Related party financing can be treated as debt or equity, whichever is best for you. The list goes on and on and I will not bore you with a list of the hundreds of tax saving elections.
But, I do want to tell you how to make an international tax avoidance election.
First, get your computer software to create what is called a trial balance. It is a list of all of the accounts in your general ledger. Then either purchase a trial balance tax planning software program or use Excel and make one.
Then, start posting (which means a debit and a credit) the items of income or expense for each year. Remember, in this blog you are late. So maybe this is the year 2017 and your first year was 2014. You can use hindsight to see what elections work best over these four years.
Major traps that I have seen is “investment in U.S. property” by a controlled foreign corporation. This can end a tax deferral. One of the traps is the check the box election.
Another is related party advances. American tax law has a harsh law known as “debt versus equity”, My blog has many articles and war stories. So run yourself a search if you have loaned money to your foreign corporation or if you have borrowed money from it.
The elections are attached to the return as a “statement”. Across the top, type your corporate name, IRS tax identification number, the tax year (such as year ending December 31, 2017), the words “Initial Return Tax Accounting Methods Elections” and, of course, each election.
Once you make an election you are stuck with it unless you file a form requesting a change of accounting method. Also, you if change the way your do business or add a new type of activity, you can make an election in the year of the change or the new activity.
Keep a copy of the initial Form 5471 in a safe place.
IRS auditors love to dispute good tax accounting planning. So, keep a copy of your first Form 5471 for forever.
Avoiding tax penalties for late filing of Form 5471.
If you need help in avoiding the penalty or getting the penalty waive or preparing Form 5471, then call me, Brian Dooley, CPA, MBT at 949-939-3414.