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FORM 5472: POTENTIAL TAX LIABILITIES FOR FOREIGN CORPORATIONS

On Behalf of | Jun 18, 2015 | Wang IP Law Blog

If you are a foreign corporation doing business in the U.S., you may need to file Internal Revenue Service (IRS) Form 5472 or face a $10,000 penalty. The IRS automatically fines $10,000 every time it does not receive a foreign corporation’s Form 5472 on time. 26 C.F.R. § 1.6038A-4(a)(1).

Furthermore there is a chance your corporation’s fines will add up rapidly, because a foreign corporation must submit a distinct Form 5472 for every domestic or foreign related party1 that it had a reportable transaction2 with during a taxable year.3 § 1.6038A-4(a)(3).

The IRS defines a reporting corporation (or a corporation that has to file a 5472) as either a 25% foreign-owned U.S. corporation4 or a foreign corporation engaged in a trade or business within the United States. § 1.6038A-4(a)(2). The IRS requires that Form 5472 be attached to the reporting corporation’s income tax return by the return’s due date (including any extensions given to the tax return’s due date). When the income tax return is ultimately filed, a copy of Form 5472 must be attached. The IRS will fine $10,000 for every taxable year in which a reporting corporation does not file the necessary information on time, or fails to maintain the required records. Id. Be advised that failure to file continuing for more than 90 days after notification by the IRS will incur an additional $10,000 penalty for every 30 days (or fraction thereof). § 1.6038A-4(d).

If you represent a foreign corporation that has just received a penalty, however, there is a possibility that you can avoid the fine, especially if it is the first time a penalty has been issued. The corporation may file a penalty abatement request based on reasonable cause. § 1.6038A-4(b)(1). Within the request, the corporation must assert that the declarations within are made under the penalties of perjury, give all the facts that prove that it had reasonable cause for not filing Form 5472 on time, and finally show that it acted in good faith. Id. To demonstrate reasonable cause, your corporation must have filed for all open years (excluding the current year on extension if applicable). § 1.6038A-4(b)(2)(i). However, reasonable cause is not applicable for penalties incurred after the reporting corporation was notified of the requirement to file or after it was requested to give any particular compulsory information. Id.

Finally, the law allows small corporations5 another reasonable cause exemption. If small corporations can show that they were ignorant of the IRS requirements in Section 6038A, had limited interaction with and limited presence in the U.S., moves rapidly to file Form 5472, and quickly responds to all requests for information related to all reportable transactions, then the IRS will be more generous in declaring that small corporations had reasonable cause not to file on time. § 1.6038A-4(b)(2)(ii).

Reporting corporations should make sure that their tax returns have Form 5472 attached in addition to ensuring that their submissions are postmarked or filed electronically by the due date of the tax return (including any applicable extensions). Additionally, all late submissions should be rectified quickly. Wherever possible, late filings should be submitted alongside a request for a penalty abatement based on reasonable cause. Therefore, a foreign corporation that falls under the IRS definition for a Form 5472 reporting corporation may find it helpful to go over its previous tax returns and check with legal experts to make sure it has been in full compliance.

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