Certain corporations, both U.S. and foreign, as well as foreign-owned U.S. disregarded entities, are required to file IRS Form 5472, 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 Form 5472 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 process, and consequences of late filing.
To determine if a Form 5472 filing obligation exists, three requirements must be met. Firstly, there must be a reporting corporation. Secondly, the reporting corporation must engage in a reportable transaction. Thirdly, the reportable transaction must involve a related party. Reporting corporations include U.S. corporations with at least one foreign person owning 25% or more of the corporation’s vote or value, foreign corporations with a U.S. trade or business, and 100% foreign-owned U.S. disregarded entities.
Reportable transactions include sales and purchases of inventory, rents, royalties, payments for intangible property, fees for services, commissions, loans, interest payments, and insurance premiums. Related parties are broadly defined and include 25% foreign shareholders, those related to the reporting corporation under specific tax provisions, and anyone related to the reporting corporation under transfer pricing rules. A separate Form 5472 may need to be filed for each related party with whom a reportable transaction occurs.
Numerous reporting exceptions exist, such as when a U.S. person controls a foreign-related corporation and files Form 5471 or when a related corporation is a foreign sales corporation filing Form 1120-FSC. If a reporting corporation does not engage in a reportable transaction with a related party in a tax year, there is no Form 5472 filing requirement. Reporting corporations must attach Form 5472 to their income tax return by the due date, including extensions. Foreign-owned U.S. disregarded entities must file a pro forma Form 1120 with an attached Form 5472 by the due date.
Penalties for late filing of Form 5472 were increased to $25,000 per failure to file for the 2018 tax year and later. Continuation penalties of $25,000 per 30-day period may apply if the form is not filed within 90 days of an IRS notice of failure. The reporting corporation may request a waiver of penalties if reasonable cause for late filing can be shown. Additionally, certain reporting corporations must maintain records associated with Form 5472 reporting and related party transactions, with separate penalties applying for failure to do so.
In conclusion, understanding and complying with Form 5472 filing requirements is crucial for certain corporations and disregarded entities to avoid significant civil penalties and IRS issues. By meeting the filing obligations, exceptions, and record-keeping requirements, these entities can ensure compliance with IRS regulations and avoid potential penalties. It is important for tax professionals and entities subject to Form 5472 requirements to stay informed and up to date on these regulations to prevent any potential negative consequences.
