Form 5472 filing requirement for foreign-owned companies
Nobody wants an audit notice from the Internal Revenue Service (IRS). But can it be avoided?
Laws continually change, so it’s critical for foreign-owned entities to keep up with U.S. legislation. An easy but often overlooked tactic is to review your tax compliance activity regularly. This simple step can alleviate many of your concerns and result in a more favorable outcome if you’re subject to an IRS audit.
Start with commonly filed forms: Form 5472
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Tax, is one of the most commonly filed tax forms. And it’s a high-exposure reporting requirement. The IRS uses Form 5472 to understand global transactions and identify transfer pricing and withholding tax issues between domestic and foreign-related parties.
Form 5472 is generally included in a taxpayer’s U.S. corporate income tax return. If a taxpayer fails to file Form 5472 or the filed form is substantially incomplete, the statute of limitations on the taxpayer’s corporate income tax return will be extended three years after the date the completed forms are submitted to the IRS.
A simple oversight can be costly. In 2017, the Tax Cuts and Jobs Act (TCJA) increased the noncompliance penalty from $10,000 per form to $25,000 per form, plus an additional $25,000 for each month the failure continues, beginning 90 days after the IRS notice about the failure is mailed to the taxpayer. There is no upper limit on the penalty; it may continue to accrue until the failure is cured.
Who does Form 5472 apply to?
If you are a foreign-owned U.S. corporation and have transactions with foreign or domestic parties, Form 5472 likely applies to you.
The IRS requires Form 5472 to be filed when:
- 25% or more of a U.S. company is foreign owned.
- 25% or more of a U.S. disregarded entity is foreign owned (e.g., single-member limited liability companies).
- A foreign corporation engages in a U.S. trade or business.
Form 5472 reporting requirements
Reportable transactions include loans, sales of goods and services, commissions, rent, royalties, interest and other amounts paid or received between the related parties.
The reporting requirement was expanded by the TCJA to include information related to newly enacted international tax rules (e.g., disallowed deductions paid in hybrid transactions or with hybrid entities under IRC 267A, foreign-derived intangible income deductions under IRC 250 and information related to Base Erosion and Anti-Abuse Tax under IRC 59A).
Separate 5472 forms are required for each related party with reportable transactions.
Potential penalty relief if you overlook Form 5472
For taxpayers who overlooked this filing requirement previously, the IRS has delinquent international information return submission procedures that can provide relief if there was a reasonable cause for the failure to file.
To qualify for the relief, a taxpayer must not be under a civil examination or a criminal investigation by the IRS. In addition, they must file for relief before they’re contacted by the IRS about the delinquent information returns. The delinquent information return must be attached to an amended income tax return (Form 1120X, Amended US Corporate Income Tax Return), along with a statement of reasonable cause.
In a recent court case, Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023), the U.S. Tax Court held that the IRS may not automatically assess penalties for failure to file Form 5471 (Information Return of U.S. Persons with respect to Certain Foreign Corporations). However, the IRS can still assess penalties through civil action.
The IRS is expected to appeal this decision. While not certain, the Farhy ruling could have significant implications on other information reporting penalties, including those related to Form 5472.
How Wipfli can help
Form 5472 is one of many forms that are required for inbound clients. In fact, it can take a team to stay on top of them all. That’s where we come in. Our international tax specialists can help you track multinational requirements, prepare and file tax forms, and avoid and mitigate penalties. Contact us today for more information on international tax compliance and penalty relief.
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