Certain corporations (both U.S. and foreign) and certain foreign-owned U.S. disregarded entities must 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. The failure to file Forms 5472 can result in significant civil penalties and IRS headaches. Therefore, it is important for these entities and their tax professionals to better understand the filing obligation, its exceptions, the mechanics of filing, and the consequences of filing late. This article provides that information and more.
Who Must File
A Form 5472 filing obligation arises if three requirements are met. First, there must be a “reporting corporation”. Second, that reporting corporation must engage in a “reportable transaction”. And third, the reportable transaction must be with a “related party”. Each of these are defined terms.
There are three types of reporting corporations. Initially, a reporting corporation includes a U.S. corporation that has at least one foreign person who owns 25% or more of the vote or value of the corporation. For these purposes, complicated attribution rules may apply.
In addition, a reporting corporation includes a foreign corporation with a U.S. trade or business. However, such foreign corporations are not reportable corporations—and therefore do not have Form 5472 filing requirements—if the foreign corporation does not have a permanent establishment in the U.S. under a governing U.S. tax treaty.
Finally, by regulation, a reporting corporation also includes a U.S. disregarded entity that is 100% foreign owned.
Generally, a “reportable transaction” means any transaction to the extent it is taken into account for the determination and computation of the reporting corporation’s taxable income. Therefore, reportable transactions include: (i) the sales and purchasing of inventory and tangible property; (ii) rents and royalties; (iii) amounts paid and received for intangible property (e.g., copyrights, patents, etc.); (iv) consideration paid and received for managerial, engineering, and other services; (v) commissions; (vi) borrowings and loans; (vii) interest paid and received; and (viii) premiums paid and received for insurance.
Related parties are defined broadly by statute and regulation. They include: (i) any direct or indirect 25% foreign shareholder of a reporting corporation; (ii) persons who are related to the reporting corporation or to a 25% foreign shareholder of the foreign corporation under sections 267(b) or 707(b)(1); and (iii) any other person related to the reporting corporation within the meaning of section 482 and those regulations (i.e., the transfer pricing rules).
Significantly, the Form 5472 filing obligation arises separately with respect to each related party in which the reporting corporation has a reportable transaction. Thus, more than one Form 5472 may have to be filed each tax year, depending on the number of related-party reportable transactions.
Are There Any Reporting Exceptions
Numerous Form 5472 reporting exceptions exist. For example, there is no Form 5472 reporting obligation to the extent a U.S. person controls a foreign-related corporation and files Form 5471 to report the same information on Schedule M. In addition, if a related corporation is a foreign sales corporation and files Form 1120-FSC, there is no Form 5472 reporting requirement. But these two exceptions do not apply if the reporting corporation at issue is a foreign-owned U.S. disregarded entity.
Although not a technical reporting exception, it is worth repeating again that there is no Form 5472 filing requirement if a reporting corporation does not enter into a reportable transaction with a related party in any tax year.
How To File
Generally, reporting corporations must attach Form 5472 to the corporation’s income tax return by the due date, including extensions. This rule applies to both U.S. and foreign corporations that are reporting corporations.
A different reporting rule applies with respect to foreign-owned U.S. disregarded entities because they do not have separate income tax return filing obligations. For these entities, the IRS requires the filing of a pro forma Form 1120 with an attached Form 5472 by the due date, including extensions, of the Form 1120. The pro forma return should include the name and address of the disregarded entity and only certain specified information on the first page of the Form 1120. In addition, the pro forma Form 1120 and the attached Form 5472 must be mailed to a dedicated IRS mailing address with the words “Foreign-Owned U.S. DE” written across the top of the Form 1120 (the IRS will not currently accept electronic filing).
What If I File Late
Prior to the 2018 tax year, the failure to file Form 5472 could result in a civil penalty of $10,000. However, Congress increased the penalty for the 2018 and later tax years to $25,000 per failure to file. In addition to these initial penalties, the IRS may impose continuation penalties if the reporting corporation fails to file Form 5472 within 90 days after IRS notice of the failure. In these instances, the continuation penalties are additional $25,000 penalties for each 30-day period after the 90-day grace period.
Similar to other international reporting penalties, the reporting corporation may request a waiver or abatement of the Form 5472 penalty if the corporation can show reasonable cause for the late filing.
Do I Need To Maintain Certain Records
In addition to filing a Form 5472, certain reporting corporations must maintain records associated with the Form 5472 reporting and related party transactions. These records include, for example, profit and loss statements and other internal accounting and business records that support the reporting. Generally, these records must be maintained “as long as they may be relevant or material to determining the correct tax treatment of any transaction between the reporting corporation and a related party[.]” See Treas. Reg. § 1.6038A-3(g).
By statute, separate $25,000 civil penalties may apply if a reporting corporation has a requirement to maintain records and fails to do so. Of course, even if the corporation does not have a record-keeping requirement, it would be a best practice for the exempt corporation to maintain tax records for at least three years (and better yet, six years) in the event the corporation is selected for IRS examination.
