Are You Overlooking Key U.S. Tax and Reporting Requirements for Foreign-Owned Businesses?

In Brief:

Foreign-owned businesses and U.S. investors in foreign entities face additional and often complex U.S. tax and financial reporting requirements.
Missing required filings such as FBAR, Form 5471, or Form 5472 can result in significant IRS penalties and in some cases criminal exposure.
FBAR reporting is required when foreign bank accounts exceed $10,000 at any point during the year, regardless of where the business operates.
Financial reporting mistakes such as incorrect consolidation models or foreign currency translation errors can distort U.S. GAAP financial statements.
Weak internal controls and poor documentation of intercompany transactions increase audit, compliance, and transfer pricing risks.

Doing business in the U.S. means understanding and complying with a multitude of tax and financial reporting requirements. Whether a company is foreign-owned and doing business in the U.S., or is based abroad but has U.S. investors, complex tax and financial reporting rules apply.

The following are key tax and financial reporting rules that foreign-based businesses and U.S. investors in foreign businesses should be aware of.

Tax Reporting

Taxpayers who own an interest in a foreign corporation have certain annual reporting obligations that must be understood and fulfilled, or significant penalties can be incurred. The following are three of the most significant, and often misunderstood, reporting requirements:

FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR).

The FBAR is due by April 15 annually, with an automatic extension until October 15, and must be filed by citizens, residents, corporations, partnerships, LLCs, trusts, and estates that have a financial interest or signature authority over one or more foreign financial accounts, such as savings, checking, and brokerage accounts. The reporting requirement is triggered when the combined value of all foreign accounts exceeds USD $10,000 at any point in the year. Unlike other reporting requirements, which are filed with the IRS, the FBAR is filed with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) using FinCEN Form 114. The FBAR filing requirement is a provision of the Bank Secrecy Act and is aimed at reducing tax evasion. Criminal penalties for willfully failing to file an FBAR may result in a fine of $250,000 and/or 5 years of imprisonment.

IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

The Form 5471 filing requirement applies to U.S. citizens, green card holders or residents who own 10% or more of a foreign corporation. The form is reported annually to the IRS when you file your tax returns. Additionally, if you are a U.S. shareholder of a foreign company, even if you own less than 10%, you must file Form 5471 if U.S. persons collectively own more than 50%, making the company a Controlled Foreign Corporation. Form 5471 is due at the same time your tax returns are due — March 15 for corporations or partnerships, and April 15 for individuals (June 15 if you live abroad, due to the automatic filing deadline extension). Extensions of time to file are permitted and are at parity with the extended filing deadlines for corporations, partnerships, and individuals (September 15 and October 15). Failure to file Form 5471 can result in steep penalties that are often automatic, including a $10,000 fine per form per year, and up to $50,000 in additional penalties if the form is not filed within 90 days of receiving an IRS notice. Additionally, foreign tax credits may be reduced, meaning you could be taxed twice for income already taxed abroad. Criminal penalties are possible if the failure to file is chronic and considered willful.

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

Form 5472 focuses on foreign persons or entities that own interests in U.S. companies, or that have subsidiaries of foreign companies in the U.S. Specifically, annual filing of Form 5472 is required of:

S. businesses with at least 25% foreign ownership and a reportable transaction. A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
Foreign corporations engaged in a U.S. trade or business.
S. disregarded entities fully owned by a foreign person must also file Form 5472, even if they are not obliged to file income tax returns.

Form 5472 must be filed with the reporting corporation’s yearly income tax return. Failure to file can result in a penalty of $25,000 per form per year for each year the filing was not made. An additional $25,000 penalty can be attached if the failure continues more than 90 days after receiving an IRS notice. Criminal penalties may apply if the reporting company fails to submit required information or files false or fraudulent information.

All of these reporting requirements are mandated by law and must be filed every year to avoid exposure to significant penalties. Moreover, the information that is reported in some of these filings may impact a taxpayer’s or company’s access to certain tax benefits.

These forms are complex and require professional guidance by a CPA firm with significant experience working with foreign-based companies and U.S. owners of foreign entities.

Financial Reporting

On the financial reporting side, financial reporting errors can be a stubborn problem for foreign-based businesses. Recurring mistakes — ranging from misapplied consolidation models to weak internal controls — can distort financial statements and expose companies to costly penalties.

Misunderstanding Consolidation Models

At the heart of some financial reporting problems is a misunderstanding of U.S. GAAP’s dual consolidation framework. While the Voting Interest Entity (VOE) model is widely recognized, the Variable Interest Entity (VIE) model is often overlooked.

Under VOE, a controlling financial interest generally exists when a company holds a majority voting stake in another entity. But VIE requires a deeper analysis: a reporting entity must both direct the activities that most significantly affect the VIE’s economic performance and absorb losses or receive benefits that could be significant.

Companies relying solely on VOE risk underreporting their exposure, leading to incomplete consolidation and potential misrepresentation of financial health.

Foreign Currency Translation Errors

Global operations add another layer of complexity. Missteps in foreign currency translation are among the most common errors.

Translation is used for consolidation purposes. In some cases, a subsidiary may use a different currency than the parent company. They need to convert the functional currency into the consolidated entity currency.

The first challenge lies in determining the functional currency, defined as the currency of the primary economic environment in which the entity operates. Once established, translation into the parent’s reporting currency must follow strict rules:

Use the closing rate at the period end for assets and liabilities
Use average rates for the period for income and expenses. Use historical rates for equity

It’s essential to understand which currency rates to use and when to use them. Failure to apply these standards correctly can distort consolidated financials, creating discrepancies that ripple through balance sheets and income statements.

Weak Internal Controls and Documentation

Beyond technical accounting rules, internal oversight remains a critical vulnerability. Inadequate monitoring of intercompany transactions — such as loans, royalties and service fees — is a recurring issue in many companies. Without proper arm’s-length documentation, companies risk triggering transfer pricing audits and penalties.

Equally concerning is the absence of documented internal policies. Without written procedures for approvals, reconciliations and compliance checks, organizations leave themselves open to errors and fraud. Strong internal controls are not optional — they are essential safeguards for financial integrity.