Form 5471 quote for a small foreign company: books to prepare

Why is a Form 5471 quote high for a small company?

Company size generally does not shrink the form. A US owner who controls a foreign corporation (more than 50% of its voting power or value) completes the same set of schedules whether the company has one bank account or many. A required schedule with only zero amounts is still filed, with a zero entered (Form 5471 instructions).

What changes from one company to the next is the books. The financial schedules are built from the company's accounts under US rules, one year at a time, so a quote has to cover the work of getting those accounts into the form's shape.

A case is not simple when:

• the books follow local rules, are on a cash or tax basis, or are a spreadsheet, bank statements or receipts with no ledger
• more than one year is unfiled, the forms filed for earlier years are missing, or the preparer who filed them has retired and the working papers are gone
• money moves between you and the company with no dated record
• the records are in another language, because every statement filed with the form must be in English (26 CFR 1.6038-2(h))
• the company's year ends on a different date than yours: a controlled foreign corporation with a majority US shareholder generally must use that shareholder's tax year, and for years beginning after November 30, 2025 it may no longer use a year that begins one month earlier (instructions). A company that used that repealed election has a short first required year, which is its own Form 5471 with its own books and rate, because a separate return is due for each company accounting period that ends within your tax year (Public Law 119-21, section 70352(c); 26 CFR 1.6038-2(e); IRS update)
• the company owns a foreign branch or a disregarded entity, which adds a Form 8858, or a corporate subsidiary, which needs a Form 5471 of its own (instructions)
• you share the company with a spouse, relative or partner, so whether you control it, and who files, depends on who owns what

A missing or incomplete form can carry a penalty of $10,000 per company per year, owed by the US person who must file, not the company. If the failure continues more than 90 days after the IRS mails a notice, a further $10,000 applies for each 30-day period or fraction, up to $50,000 more (instructions; 26 CFR 1.6038-2(k)). Relief for reasonable cause exists but is decided on the facts. The penalty counts year by year, so the number of unfiled years matters when comparing quotes. A missing form also keeps that year's tax open until three years after the information is furnished, or only the related items if the failure had reasonable cause (section 6501(c)(8)).

If you and another US person must furnish the same information for the same company and year, one joint Form 5471 can be filed with any one of your returns. The others generally attach a statement identifying it, and a Category 4 filer also completes a separate Schedule P (earnings already taxed to that owner). If you rely on someone else's filing and it is incorrect or incomplete, the penalty can still reach you. A person with no direct shares who files only because a US person's shares are attributed to them need not file if that US person furnishes all the information (instructions; 26 CFR 1.6038-2(j)).

If more than one year is unfiled, the old preparer's papers are gone, or the quotes do not fit the company's size, see catching up on missed foreign reporting and cross-border tax help. The table under "What drives a Form 5471 fee up or down?" shows what raises and lowers a quote.

Gather for each year: the year-end trial balance (a list of every account in the books with its closing balance, in local currency), bank statements, the share register, local filings, and a list of every loan, dividend and payment between you and the company. The full list is below.

Which form applies and which filing category you are come first, including whether shares held by family or other owners count toward your control. See which form your foreign business files and US owners of foreign companies.

What statements does Form 5471 take from the company's books?

A controlling owner's Form 5471 includes an income statement, a balance sheet, current and accumulated earnings and profits, and a list of dealings with the owner. The regulation requires a profit and loss statement, a balance sheet, and an analysis of changes in the surplus accounts (the equity accounts, such as retained earnings), with opening and closing balances (26 CFR 1.6038-2(g)).

Which schedules apply depends on your filing category. A controlling owner files the schedules above and further ones this page does not cover (the instructions list them for a sole owner of a controlled foreign corporation), and a smaller owner may file fewer. Your category and those extra schedules are in US owners of foreign companies.

Can my local-country books be used as they are, or must they follow US accounting rules?

The local books are the starting point, not the finished statements. The form words Schedules C and F as US generally accepted accounting principles (US GAAP). The earnings and profits rules start from the books kept for shareholders and adjust them to US accounting principles, then to US tax standards (Form 5471; 26 CFR 1.964-1(a)).

For earnings and profits, no adjustment is required unless it is material. Materiality depends on the adjustment's size against the company's assets and annual profit or loss, how consistently the practice is applied, and whether the item recurs (26 CFR 1.964-1(a)(2)). The form does not state the same test for Schedules C and F, so how much restating those two statements need is a preparer's judgment.

The regulation lists accounting practices that are not given effect (26 CFR 1.964-1(b)), such as:

• an allocation to an arbitrary reserve out of current income
• depreciation based on anything other than historical cost, such as replacement values or appreciation
• inventory written down below market value, even when local law allows it
• income and expense smoothed across more than one accounting period, even when local law allows it

A box on the form lets some filers use local-standard or management accounts instead. Revenue Procedure 2019-40 limits it to unrelated US shareholders who cannot readily get the company's information, and it does not cover a company controlled by US persons, so a US owner who controls the company and keeps its books is generally outside it (instructions, Items F and G).

What if the company has no ledger, only bank statements?

The statements come from accounts, so the accounts have to be built first, one year at a time. Without a ledger, that means working from the bank statements, sales invoices, supplier bills and loan papers, setting up the owner account and opening balances, and only then restating to US rules. That is bookkeeping work, and how much of it there is shapes the quote. To limit it, keep one folder per year with every bank statement, invoice and bill, the share register, and a dated list of the money that moved between you and the company.

Which currency and exchange rates go on the income statement and the balance sheet?

The income statement is in the company's functional currency with a dollar column beside it, and the balance sheet is in dollars. The dollar amounts on Schedules H and M use the average exchange rate for the company's own tax year, which may not match the calendar year, and Schedules C and F follow US GAAP translation rules. If the functional currency is the dollar, only the dollar column of Schedule C is completed (Form 5471; instructions).

The functional currency is set under section 985: the currency of the economic environment where a significant part of the unit's activities are conducted and which it uses to keep its books, or the dollar if its activities are primarily conducted in dollars (section 985). A company that trades and keeps its books in its local currency generally has that currency as its functional currency. The company's functional currency code goes on page 1.

The average-rate rules come from the instructions and section 989(b). The instructions send Schedules C and F to US GAAP translation rules instead of naming one rate, so the preparer applies those rules and should keep the rates used with the working papers. A company that uses the dollar approximate separate transactions method (DASTM), which is for a hyperinflationary local currency, follows different translation rules for Schedules F and H, so tell the preparer if the local currency is hyperinflationary (instructions).

Every rate on the form is written the same way: units of local currency per one dollar, rounded to at least four places (instructions). A rate written as dollars per unit of local currency is the wrong way round.

The IRS says it has no official exchange rate and generally accepts any posted rate used consistently. It publishes yearly averages in the same per-dollar form (IRS yearly average rates). That table shows three decimals, so a rate with four or more places may need another posted source. Pick one published source and use it throughout. For a US business holding foreign currency, see foreign currency accounts in US books.

What are retained earnings and earnings and profits, and which records do they come from?

Retained earnings is the accounting balance on the balance sheet. Earnings and profits (E&P) is the US tax measure of the company's profit, worked from the same books after US adjustments and tracked year by year on Schedules H and J. The regulation computes it substantially as if the foreign company were a domestic corporation, in the company's functional currency (26 CFR 1.964-1(a)). The two numbers differ by those adjustments.

Current-year E&P (Schedule H) starts with the year's net income per the books, then adds or subtracts adjustments (Schedule H):

The line-by-line instructions are in the Form 5471 instructions, Schedule H. The result is converted to dollars at the average rate for the year.

Accumulated E&P (Schedule J) carries the balance forward. The opening balance should equal the prior year's closing balance. If it does not, the difference goes on line 1b with an attached explanation. Current-year E&P is added from Schedule H. A distribution reduces the balance only to the extent it is paid out of E&P (section 312(a)): Schedule J line 9 matches the E&P part of each distribution listed on Schedule R, column (d), and a return of capital is left out of that column (Schedule J; Schedule R; instructions). The records are last year's filed Schedule J and the company's dividend records, with each distribution's date, amount and what it was paid out of.

Income that the US taxes to you before the company pays a dividend is covered in US owners of foreign companies.

What should I send my preparer: trial balance, bank statements, share register, local filings?

Send the records that let the preparer rebuild each statement for each year. The list below follows the schedules above. Form 5471 is attached to your income tax return and filed by that return's due date, including extensions, so each year's books are needed by then (instructions). For an individual on the calendar year that is April 15, two months later for a US citizen or resident living abroad, or October 15 with an extension (IRS extensions). A corporate owner's date follows its own tax year.

Books and records relating to the form must be kept as long as their contents may become material to any Internal Revenue law (instructions). If the old preparer kept the working papers, ask for them now.

Which dealings between me and the company does the form ask about?

Schedule M lists the company's dealings with you, with any other company or partnership you control, and with any US person who owns, at the time of the dealing, 10% or more in value of any class of the company's stock or of a corporation that controls it, such as a co-owner. The test is by class of stock, so where the company has more than one class, a co-owner with a smaller share of the whole company can still count (section 6038(a)(1)(D); 26 CFR 1.6038-2(f)(11)). Only a Category 4 filer completes it. Each line is a total for the year, except the loan lines and the accounts payable and receivable lines, which take the largest balance reached during the year. All are translated at the average rate (Schedule M; instructions).

The loan lines ask for the largest balance reached during the year. They do not want the year-end balance, the average, or the total cash moved (instructions). A single dated owner account in the ledger gives the preparer that number. The accounts payable and receivable lines take the largest balance too, but only for amounts that arose from services or from selling or processing property. A trade balance for services or goods that never goes beyond what is ordinary and necessary for the business is kept out of the loan lines. A company on the accrual method reports accrued, not cash, amounts on every line of the schedule (instructions).

The instructions give no separate line for expenses you paid on the company's behalf. A balance the company owes you may fall under the loan lines or the payable lines, depending on what it arose from, so the preparer has to classify it. The same goes for personal expenses paid from the company account.

If a loan carries interest, keep its terms: Schedule G can ask about the interest rate charged (Form 5471).

What if the company is dormant or has almost no activity?

A dormant company, as the IRS defines it, may file a summary return. A company with almost no activity that is not dormant files the full schedules, mostly with small amounts and zeros. Either way, gather the year's bank statements and the share register: a company that sold nothing can still have bank fees, interest, a loan from you or a tax charge, and those are the amounts the schedules report.

The summary procedure applies to a "dormant foreign corporation" as defined in section 3 of Revenue Procedure 92-70, and the filer completes page 1 only (instructions). The instructions do not restate the definition. Read the revenue procedure before relying on it, and check it again each year. The summary return is still a filing for each year. See also which form your foreign business files, which compares the dormant routes for Forms 5471 and 8858.

What if several years are unfiled or my old preparer retired?

Each unfiled year is its own Form 5471, with its own books, its own rates and its own penalty and open tax year, as the first section shows.

For books, a multi-year catch-up means:

1. A trial balance and bank statements for every year. The oldest year with missing records usually holds up the rest, because Schedule J carries each year's closing balance into the next year.
2. A rate for each year, not one rate reused.
3. A starting balance. If the old preparer filed earlier years, the filed Schedule J closing balance is the starting point. If it is unavailable, the opening E&P balances may have to be rebuilt from earlier books.
4. One method across the years. A change of accounting method between years can need an adjustment so that nothing is counted twice or left out (26 CFR 1.964-1(c)(2)).

The IRS describes one route for late international information returns: someone who is not under examination or investigation, and has not been contacted about them, files through the normal procedures, with Form 5471 attached to an amended income tax return. If the income tax return itself was never filed, the form goes with that late return instead. A reasonable cause statement may be attached, but penalties may be assessed without considering it first (IRS delinquent procedures; instructions). Whether that route fits depends on the facts, such as whether the income was reported and why the forms were missed, and the IRS page lists other offshore options beside it. The routes, how penalty relief is handled, and what contact from the IRS changes are covered in catching up on missed foreign reporting.

What drives a Form 5471 fee up or down?

The fee follows the work, and the work follows the books, the number of years and the owner's dealings with the company. No official source sets a fee, so the table shows direction only.

Before accepting a quote, check which years it covers, which schedules it includes, and whether it assumes you supply US-style books or includes restating the local ones. If you control the company, the return includes the owner-dealings and E&P schedules, so ask whether a quote includes them.

Example

These examples are illustrative. The rates are round numbers chosen to keep the arithmetic simple, not market rates. Dollar amounts are US dollars; EUR, HKD and INR are the company's own currency. Each company is treated as a corporation for US tax, which is the default for a foreign company whose owners all have limited liability unless an election says otherwise (26 CFR 301.7701-3(b)(2)), and uses the same tax year as its owner.

Berlin owner of a small GmbH (euros)

A US citizen in Berlin owns 100% of a GmbH. For the year it has revenue of EUR 80,000 and expenses of EUR 60,000, so book profit is EUR 20,000, in books kept in the German format. She controls the company, so she files the full set of schedules.

Her preparer restates the income statement to US rules in euros, the functional currency if the company does business in euros. At an average rate of 0.8000 euros per dollar, revenue is $100,000, expenses $75,000 and profit $25,000 before any restatement adjustments. The balance sheet goes in dollars, and current E&P starts from the euro profit.

She lent the company EUR 10,000 in March and was repaid EUR 4,000 in October. Schedule M shows the largest balance during the year, EUR 10,000 ($12,500 at the same average rate). The EUR 6,000 still owed at year end appears on the balance sheet as a loan from a shareholder.

Hong Kong company with no sales (Hong Kong dollars)

A US citizen owns 100% of a Hong Kong company that had no sales all year and paid HKD 4,000 in bank fees. Its functional currency is the Hong Kong dollar. The first question is whether it is dormant under Revenue Procedure 92-70. If it is, the summary filing is page 1 only.

If it is not, the schedules are still completed. Schedule C shows expenses of HKD 4,000 and a loss of HKD 4,000, which is $500 at an average rate of 8.0000 Hong Kong dollars per dollar, with zeros where nothing happened.

Indian private limited company, three years unfiled (rupees)

A US resident owns 100% of an Indian private limited company with revenue of INR 6,000,000 a year. Three years of Form 5471 are unfiled and the old preparer has retired.

Each year needs its own trial balance and its own rate. The first year's closing E&P becomes the second year's opening balance, so missing records for the first year hold up all three. The penalty is counted per year, for three forms.

Different for you?

• You own a company abroad and one or more years are unfiled, or the old preparer is gone: which years are open, and which form and category apply, turn on the filing history. See catching up on missed foreign reporting and get cross-border tax help.
• The company has no ledger, the books are in another language, or they are on a local or cash basis: whether they can be restated for the return or must be rebuilt, and how much work each is, depends on what records exist. See bookkeeping help and cross-border tax help.
• A quote does not fit the size of the company: bring the quote and a list of the records you hold to cross-border tax help. Which years and schedules it covers is the first thing to settle.
• You have an IRS notice about the missing forms: check the response date on the notice, gather it and your records, and see cross-border tax help promptly.
• You do not know whether the company needs Form 5471, 8858, 8865 or none: see which form your foreign business files.
• You closed, sold or merged the company, or changed how it is classified for US tax: the year of the change has its own reporting, such as a final-year Form 5471 or an ownership-change schedule, and a classification election has its own deadline. See which form your foreign business files.
• You need your filing category, the controlled foreign corporation tests or the income taxed before a dividend, or you share the company with a spouse, relative or partner: see US owners of foreign companies, which also covers whose shares count toward control. Who files the form and what each owner attaches are worth settling with cross-border tax help.
• The company is a Canadian corporation with books in Canadian dollars: see turning Canadian corporation books into the Form 5471 statements.
• The business is a branch or a disregarded entity, not a corporation: see the Form 8858 balance sheet.
• You are treated as a nonresident of the US under a tax treaty and claim that benefit: a narrow rule lets such an individual file the company's audited foreign statements in place of the US-basis statements, but only if no other US person must report the company. See cross-border tax help before relying on it (26 CFR 1.6038-2(j)(2)).