I understand the confusion about filing for a "dormant" entity, but think of Form 5471 like this: it's not just about reporting business income - it's about transparency. The IRS needs to know about ALL foreign entities controlled by US persons, even if they never operated. Your client was legally the owner/director of a Belize corporation from the moment it was incorporated until it was dissolved. That relationship triggers the filing requirement regardless of activity level. The good news is that most schedules will be straightforward since there were no transactions, funding, or operations to report. The penalty for not filing starts at $10,000 and can increase, so it's definitely not worth the risk. Plus, having a complete filing actually protects your client by creating a clear paper trail showing the entity's brief, inactive existence should the IRS ever have questions down the road.

Based on my experience with similar situations, your client definitely needs to file Form 5471. I had a client who formed an Irish company that never operated, and we initially thought we could skip the filing since there was no business activity. Big mistake - the IRS sent a notice about the missing form and we had to go through the reasonable cause process to avoid penalties. The key thing to remember is that Form 5471 is an information return, not just a tax return. It's required whenever a US person has the required ownership/control relationship with a foreign corporation, regardless of activity level. For your client's situation with the Belize corporation, even though it's being dissolved in the same year with zero operations, the filing is still mandatory. The silver lining is that with no funding, no business operations, and no income, most of the schedules will be very simple to complete. Just make sure to get proper dissolution documentation from Belize as others have mentioned, and file the 5471 with the client's personal return. It's much easier to file a simple 5471 now than deal with penalty notices later.

This might be a dumb question, but wouldn't it just be easier to call FreeTaxUSA support? I had this exact same issue last year and their customer service walked me through the exact screens where I needed to indicate I was withdrawing contributions and not earnings.

I went through this exact same situation last year with a Code J distribution from my Roth IRA. The key thing to remember is that with Roth IRAs, the IRS assumes you're withdrawing contributions first (this is called the "ordering rules"), so as long as you haven't exceeded your total contribution basis, you should be fine. When you get to the FreeTaxUSA screen for entering your 1099-R, make sure you select "Roth IRA" as the account type. Then there should be a series of questions about whether this is a qualified distribution, early distribution, etc. Look for the question that asks if you're withdrawing contributions - this is where you indicate that your $5,000 came from contributions rather than earnings. The software should automatically generate Form 8606 Part III for you once you indicate this is a contribution withdrawal. Just make sure you have documentation of your total contributions over the years to verify that $5,000 doesn't exceed what you've put in. If you're unsure about your contribution history, check with your IRA provider - they usually track this information.

I feel for you - the uncertainty is the worst part! I went through a similar CP05 review last year after amending and it took about 6 months total, but I did eventually get my full refund. The key thing that helped me was staying organized with all my documentation and being patient (easier said than done, I know). One tip: if you haven't already, create an online IRS account so you can monitor your transcripts - look for any 846 codes which indicate refund processing. The fact that they acknowledged your amendment fixed the frivolous filing issue is definitely a positive sign. Try calling that 866 number they provided if you hit the 120-day mark with no updates. Hang in there - most people in your situation do get their refunds eventually! 🤞

I'm going through almost the exact same thing right now! Filed in March, amended in July, got my CP05 in October. The "frivolous position" thing freaked me out at first but my tax preparer explained it's usually something minor that gets flagged by their system. The good news is you avoided that huge penalty! I've been checking my transcripts weekly and calling every month or so. No movement yet but the IRS rep told me amended returns with CP05 letters are taking 4-6 months minimum this year due to staffing issues. I know the wait is killing you (trust me, I feel it too) but from everything I've read here and other forums, most people do eventually get their refunds. Keep your documentation ready and maybe try calling that number if you haven't heard anything by the 4-month mark. We got this! 💪

This is such a timely discussion! I'm dealing with a similar situation but with an added wrinkle - one of my partnerships changed their reporting method mid-stream. For the first two years, they reported my guaranteed payments in Box 5 as interest, but last year they switched to Box 4b without any changes to the partnership agreement. When I called to ask about the change, the partnership's accountant said they got advice that Box 4b was "more appropriate" for guaranteed payments for capital contributions, but couldn't give me specifics about what changed their analysis. This creates a headache for me because now I have inconsistent treatment across years for the identical economic arrangement. Has anyone dealt with a partnership changing their reporting approach? Should I be concerned about this inconsistency, or is it actually a correction that's beneficial in the long run? I'm also curious - for those who've spoken with IRS agents about this topic, did they indicate any preference for how partnerships should be reporting these payments? Or is it truly just a matter of reasonable interpretation based on the agreement terms?

I've been following this thread closely because I'm dealing with almost identical issues with my partnership investments. What strikes me is how much confusion exists even among tax professionals about the proper treatment of guaranteed payments for capital. One thing I'd add to this discussion is the importance of looking at the actual partnership agreement language. I've found that many partnerships use terms like "preferred return," "priority distribution," and "guaranteed payment" interchangeably, but they have very different tax implications. A true guaranteed payment under Section 707(c) is supposed to be determined without regard to partnership income - meaning you get paid even if the partnership loses money. If your payment is contingent on partnership profits, it's more likely an allocation that should go in Box 1, not a guaranteed payment in Box 4. For those dealing with PFIC issues, I'd strongly recommend getting professional help with the QEF elections. The timing and calculation requirements are incredibly complex, and mistakes can be costly. The excess distribution rules under Section 1291 are particularly punitive if you don't have a proper QEF election in place. Regarding the NIIT question - yes, both guaranteed payments for capital and interest income are generally subject to the 3.8% Net Investment Income Tax if you're not materially participating in the business. The "nonpassive" characterization on Schedule E doesn't exempt it from NIIT. Has anyone here dealt with partnerships that converted from domestic to foreign entities? I'm curious about the tax consequences of that conversion itself, separate from the ongoing PFIC issues.

Has anyone run into issues with banking or business operations by not having a Partnership Representative? We're trying to decide if we should just pay a US person to serve as our PR instead of opting out of BBA.

I've been through this exact situation with my EU-based business partner last year! The BBA opt-out was definitely the right choice for us, and it's much simpler than it initially appears. Just to add to what others have mentioned - when we opted out, we didn't face any complications with our tax treaty benefits. Our accountant confirmed that the opt-out actually made things cleaner since it eliminated the need for ongoing PR correspondence with the IRS. One thing I'd recommend is double-checking that your partnership income is properly classified. Since you mentioned having income from outside the US, make sure you understand whether any of it constitutes "effectively connected income" (ECI). If it's not ECI, you likely won't need to file individual Form 1040-NR returns, which simplifies things considerably. Also, keep good records of your opt-out election. We created a simple file with copies of Schedule B and Schedule B-2 from our 1065 filing, along with notes about why we qualified for the election. It gives us peace of mind for future years. The whole process ended up being much more straightforward than we anticipated. With your simple financial situation, you should be able to handle this without too much difficulty once you understand the opt-out mechanics.