Increased compliance burden for US expatriates who own CFCs

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The IRS has released new forms required for US citizens who own foreign (e.g. Canadian) corporations which are treated as Controlled Foreign Corporations (“CFCs”) for US tax purposes.

The penalties for failure to complete these forms could be significant, beginning at USD $10,000 per year for each corporation.  Therefore, US taxpayers are advised to take these forms seriously notwithstanding the increased compliance costs of completing them.

For those who believe that the IRS pays scant attention to foreign-based US citizens filing tax returns, the IRS recently announced plans to hire 400 to 500 new employees for its international unit.  Whether and how many of the new employees will be deployed in the individual compliance area as opposed to the multinational corporate area remains to be seen.

There are three new forms and one form which has become significantly more onerous to complete.  The new forms are as follows:

  • Form 965 which rehashes the 2017 transition tax calculation as well as computes the amount due for the current year of installments for any taxpayer which elected to pay the tax in eight annual installments when filing their 2017 tax return.
  • Form 8892 computing the GILTI tax and related Form 8893 effectively allowing for the lower 13.125% corporate rate prior to the application of the GILTI. For more information about this, read our blog post, Relief provided from GILTI tax for US expatriates.
  • A significantly more complex Form 5471 reporting the CFC’s financial and U.S. tax information.

Form 5471 Changes

The changes include, but are not limited to, the following:

  • Greater detail in the reporting of realized and unrealized currency gains and losses as well foreign currency translation differences on the balance sheet.
  • Division of income tax between current and deferred in order to better calculate GILTI. Foreign taxes will also have to be tracked in separate buckets (i.e. based on what type of income is being taxed).
  • An expansion of the informational question section from eight to nineteen questions.
  • A significantly expanded schedule tracking potential dividends through historical earnings and profits.
  • A new schedule for GILTI calculations.

Have questions about how these changes could apply to you? Contact Zeifmans’ US tax partner, Stanley Abraham at 416.256.4000 ext. 356 or e-mail him at sa@zeifmans.ca.