Certain corporations, both within the U.S. and foreign-owned entities, are required to file IRS Form 5472, which is an Information Return for a 25% Foreign-Owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business. Failure to file Form 5472 can result in significant civil penalties and other issues with the IRS. Therefore, it is crucial for these entities and their tax professionals to understand the filing requirements, exceptions, how to file, and the consequences of filing late.
The Form 5472 filing obligation arises when three requirements are met. Firstly, there must be a reporting corporation. Secondly, the reporting corporation must engage in a reportable transaction. And thirdly, the reportable transaction must be with a related party. The types of reporting corporations include U.S. corporations with foreign shareholders owning 25% or more, foreign corporations with a U.S. trade or business, and U.S. disregarded entities that are 100% foreign-owned.
A reportable transaction includes any transaction that affects the reporting corporation’s taxable income, such as sales, purchases, rents, royalties, services, commissions, loans, interest, and insurance payments. Related parties are broadly defined to include foreign shareholders, persons related to the reporting corporation or foreign shareholder, and those related under transfer pricing rules. The filing obligation arises separately for each related party with a reportable transaction, potentially requiring multiple Form 5472 filings each year.
There are reporting exceptions, such as no filing obligation if a U.S. person controls a foreign-related corporation and files Form 5471 or if a related corporation is a foreign sales corporation filing Form 1120-FSC. However, these exceptions do not apply to foreign-owned U.S. disregarded entities. If a reporting corporation does not have any reportable transactions with related parties 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 of the Form 1120 and mail it to a specific IRS address. Late filing penalties for Form 5472 increased to $25,000 per failure to file for tax years after 2018, with additional penalties for continued non-compliance. Waivers and abatements may be available for reasonable cause for late filing.
In addition to filing Form 5472, reporting corporations must maintain records related to the reporting and related party transactions. These records should include profit and loss statements and other accounting and business records to support the reported transactions. Failure to maintain required records could result in separate $25,000 civil penalties. It is recommended for reporting corporations to keep tax records for at least three to six years in case of IRS examination.