Comments on IRS Form 5471.

Comments on IRS Form 5471

INTRODUCTION

Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is used by U.S. shareholders of controlled foreign corporations (CFCs) to disclose the information required by sections 6035, 6038, and 6046 of the Internal Revenue Code. Tax Executives Institute appreciates this opportunity to review and comment on the proposed revision of Form 5471. As a professional organization whose 4,300 members representing over 2,000 corporations in the United States and Canada annually prepare and file thousands of such forms, the Institute believes it is uniquely qualified to comment on the form.

GENERAL COMMENTS

Although the drafters of IRS forms and schedules should be commended for their efforts to implement the changes enacted by the Tax Reform Act of 1986 and subsequent legislation, the Institute continues to believe that extraneous information is being sought by the IRS. We believe forms should seek only that information actually necessary to determine the taxpayer's liability for tax. Indeed, where particular information will not be used to select returns for audit (or where the taxpayer's return will be audited in any event), we believe the information required to be filed with the return should be limited, especially with respect to continually audited taxpayers. In this regard, much of the information required to be submitted (for example, on Schedules C, D, and I) could be made available at the commencement of an audit of a taxpayer's return.

In addition, the IRS should accord taxpayers ample flexibility to submit required information in alternative formats. Although the instructions to the Form 5471 authorize such alternatives, taxpayers are required to obtain the IRS's prior approval. As we pointed out in our July 20, 1990, submission on various IRS forms, instructions, and schedules, taxpayers have experienced difficulty in obtaining IRS approval of computer-generated forms. Moreover, we question whether prior approval should be necessary as long as the information is set forth in the materials submitted with the taxpayer's return.

More fundamentally, we question the breadth and quantity of information requested on Form 5471 and related schedules. The proposed changes generally require technical, quantitative calculations rather than qualitative information. In essence, Schedule J constitutes the equivalent of filing a Form 1120 (U.S. Corporation Income Tax Return) for each controlled foreign corporation (CFC) - a tremendous burden for U.S. multinationals that have hundreds of affiliates. In addition, much of the data required is duplicative, e.g., the data relating to the CFC's earnings and profits and foreign tax credits are already reported on Form 1118. Requiring unnecessary and duplicative information needlessly increases the administrative costs and burden on U.S. multinationals.

We are also concerned about the type and form of information requested. It is often unclear whether the information being requested should be based on book or tax accounting principles, such as those underlying the calculation of earnings and profits. In many cases, the information is requested in a form other than that required by the underlying substantive Code provision or that conflicts with sound accounting principles. For example, the requirements for translation of foreign currency statements are inconsistent with U.S. generally accepted accounting principles and the tax accounting requirements imposed under section 902 or 964 of the Code. We strongly recommend that the IRS permit the required financial statements to be prepared in accordance with GAAP and submitted in the foreign corporation's functional currency.

In sum, TEI believes that the information required on Form 5471 could be submitted in a simpler, easier to read, and less detailed form without jeopardizing the IRS's information-gathering responsibilities. Recognizing that many of our suggestions relate not to proposed changes in Form 5471 but to provisions that are in the current version of the form...