Certain corporations, both in the United States and foreign-owned entities, as well as foreign-owned U.S. disregarded entities, are required to file IRS Form 5472, which is the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Failure to file these forms can lead to significant civil penalties and IRS issues, making it crucial for these entities and their tax professionals to understand the filing obligation, exceptions, filing mechanics, and consequences of filing late.
A Form 5472 filing obligation arises when a “reporting corporation” engages in a “reportable transaction” with a “related party”. There are three types of reporting corporations, including U.S. corporations with a foreign person owning at least 25% of the vote or value, foreign corporations with a U.S. trade or business, and U.S. disregarded entities that are 100% foreign-owned. Reportable transactions include sales, purchases, rents, royalties, services, commissions, loans, interest, and insurance.
Related parties are broadly defined and include direct or indirect 25% foreign shareholders, persons related to the reporting corporation or foreign shareholder under specific tax code sections, and those related to the reporting corporation per section 482 and its regulations. The Form 5472 filing obligation applies separately to each related party, necessitating the potential filing of multiple forms each tax year based on the number of reportable transactions with related parties.
Certain reporting exceptions exist, such as no filing requirement if a U.S. person controls a foreign-related corporation and files Form 5471, or if a related corporation is a foreign sales corporation and files Form 1120-FSC. However, these exceptions do not apply to foreign-owned U.S. disregarded entities. Filing obligations vary based on the entity type; U.S. and foreign corporations must attach Form 5472 to their income tax return, while foreign-owned U.S. disregarded entities must file a pro forma Form 1120 with an attached Form 5472 to a dedicated IRS mailing address.
Congress increased the penalty for failing to file Form 5472 to $25,000 per failure for the 2018 tax year and later. Continuation penalties may apply if the form is not filed within 90 days after IRS notice, amounting to additional $25,000 penalties for each 30-day period after the grace period. The reporting corporation can request a waiver or abatement of the penalty with reasonable cause for the late filing. Certain reporting corporations must maintain records associated with Form 5472 reporting and related party transactions to support the information submitted. Failure to maintain records may result in separate $25,000 civil penalties, making it essential to keep tax records for at least three to six years in case of an IRS examination.
