IRS Form 5472 – Who must file it?

Jun 9, 2024

Form 5472 is a crucial document for certain foreign-owned U.S. corporations and foreign corporations engaged in a U.S. trade or business. This form is used to report transactions between these corporations and their foreign or domestic related parties. The importance of Form 5472 lies in its role in maintaining compliance with U.S. tax laws and regulations. This article provides a comprehensive overview of Form 5472, its requirements, and related penalties.

Who Must File Form 5472?

  1. 25% Foreign-Owned U.S. Corporations: Any U.S. corporation with at least 25% foreign ownership must file Form 5472. This includes direct and indirect ownership by a foreign person or entity.
  2. Foreign Corporations Engaged in U.S. Trade or Business: Foreign corporations involved in any U.S. trade or business activities must also file Form 5472 if they engage in reportable transactions with a related party or a domestic related party.
  3. Disregarded Entities: Foreign-owned U.S. disregarded entities (DEs) are also subject to these filing requirements, even if they do not have an income tax return filing obligation.

Key Definitions

  1. 25% Foreign Shareholder: A foreign person who owns at least 25% of the total voting power or value of a U.S. corporation’s stock.
  2. Related Party: Includes any direct or indirect 25% foreign shareholder and other entities related through ownership or control.
  3. Reportable Transactions: Include any transactions involving the exchange of money or property between the reporting corporation and a related party. This encompasses sales, leases, royalties, and other monetary and non-monetary exchanges.

Form 5472 Filing Requirements

  1. When to File: Form 5472 must be filed with the corporation’s annual income tax return by the due date, including extensions. Foreign businesses operating in the U.S. must ensure compliance with these filing requirements to avoid penalties.
  2. Where to File: The form should be attached to the U.S. income tax return (Form 1120) for the reporting corporation.
  3. Foreign-Owned U.S. DEs: These entities must file a pro forma Form 1120 with Form 5472 attached, even if they do not have an income tax return filing obligation.

Our fee for Form 5472 and pro forma Form 1120 is $200.

Penalties for failure to file Form 5472

  1. Initial Penalty: Failure to file Form 5472 for a foreign corporation or maintain adequate records can result in a penalty of $25,000 per form, per year.
  2. Continuing Failure: If the failure continues for more than 90 days after the Internal Revenue Service notifies the corporation of the deficiency, an additional $25,000 penalty may be imposed for each 30-day period, up to a maximum of $50,000.
  3. Reasonable Cause: Penalties may be waived if the corporation can demonstrate that the failure was due to reasonable cause and not willful neglect. This requires a detailed explanation and supporting documentation.

What is considered a Reportable Transaction?

Reportable transactions include both monetary and non-monetary exchanges between the reporting corporation and related parties. These transactions cover a wide range of activities such as:

  1. Sales and Purchases: Including tangible and intangible goods.
  2. Rents and Royalties: Payments for the use of property or intellectual property.
  3. Services Provided or Received: Including cost-sharing arrangements and other service agreements.
  4. Loans and Advances: Monetary loans or advances between the corporation and related parties.

These transactions often involve exchanges between the reporting corporation and a foreign entity.

Electronic Filing

Filing Form 5472 electronically is recommended for accuracy and convenience. The IRS provides specific guidelines for electronic submission, ensuring timely and accurate compliance.

Special Considerations

  1. Amended Income Tax Return: If a corporation needs to amend its income tax return, it must also file an amended Form 5472 to reflect any changes in reportable transactions.
  2. Foreign Sales Corporation: Certain foreign sales corporations may have additional filing requirements.
  3. Natural Disasters: In some cases, penalty relief may be provided if failure to file is due to natural disasters or other extraordinary circumstances.
  4. Foreign Persons: Foreign persons owning disregarded U.S. entities must comply with new filing and record-keeping obligations as per Section 6038A of the Internal Revenue Code.

Step-by-Step Instructions for Completing Form 5472

Part I: Reporting Corporation

  1. Line 1a. Address
    • Enter the complete address, including suite, room, or unit number.
    • If using a P.O. box, enter the box number. For foreign addresses, list the city, province or state, and country, following the country’s postal code practices. Do not abbreviate the country name.
  2. Line 1c. Total Assets
    • Domestic corporations: Enter total assets from Form 1120, page 1, item D.
    • Foreign corporations: Enter total assets from Form 1120-F, Schedule L, line 17, column (d).
  3. Lines 1d and 1e. Business Activity and Code
    • Describe the principal business activity.
    • Enter the principal business activity code from the Instructions for Form 1120 or Form 1120-F.
  4. Line 1f. Total Value of Foreign Related Party Transactions
    • Enter the total value of all foreign related party transactions reported in Parts IV and VI, and Part V if the reporting corporation is a foreign-owned U.S. DE. Sum lines 22 and 36 of Part IV and the fair market value of non-monetary transactions in Part VI.
  5. Line 1g. Number of Forms 5472 Filed
    • File a separate Form 5472 for each related party. Enter the total number of Forms 5472 being filed for the tax year.
  6. Line 1h. Aggregate Value of Foreign-Related Party Transactions
    • Enter the total value of foreign related party transactions from all Forms 5472 filed for the tax year.
  7. Line 1j. First-Year Filing
    • Check the box if this is the first year the U.S. reporting corporation has filed Form 5472.
  8. Line 1k. Cost Sharing Arrangements
    • Complete Part VIII for each cost sharing arrangement (CSA) and enter the total number of Parts VIII attached.
  9. Line 1o. Principal Countries of Business
    • List the principal countries where business is conducted. Do not include countries where business is conducted solely through a subsidiary. Do not use “worldwide.”
  10. Line 2. 50% Ownership
    • Determine 50% direct or indirect ownership using the constructive ownership rules of section 318 with modifications for 25% foreign shareholders.
  11. Line 3. Foreign-Owned U.S. DE
    • Check the box if you are a foreign-owned U.S. disregarded entity.

Part II: 25% Foreign Shareholder

  1. Lines 4a-4e. Largest Direct 25% Foreign Shareholder
    • Provide information about the largest direct 25% foreign shareholder.
    • Include name, address, U.S. identifying number (SSN, ITIN, or EIN), reference ID number (if no U.S. identifying number), and foreign taxpayer identification number (FTIN), if applicable.
  2. Lines 5a-5e. Second Largest Direct 25% Foreign Shareholder
    • Provide similar information for the second largest direct 25% foreign shareholder.
  3. Lines 6a-6e. Largest Ultimate Indirect 25% Foreign Shareholder
    • Provide information for the largest ultimate indirect 25% foreign shareholder.
  4. Lines 7a-7e. Second Largest Ultimate Indirect 25% Foreign Shareholder
    • Provide information for the second largest ultimate indirect 25% foreign shareholder.

Part III: Related Party

  1. Lines 8a-8f. Related Party Information
    • Complete information for each related party, including name, address, U.S. identifying number (SSN, ITIN, or EIN), reference ID number, and FTIN if applicable.

Part IV: Monetary Transactions

  1. Lines 9-22. Monetary Transactions
    • Report all monetary transactions between the reporting corporation and the foreign-related party, including sales, rents, royalties, and other types of payments.
  2. Lines 23-36. Payments and Receipts
    • Enter detailed amounts for interest, dividends, royalties, and other financial exchanges.

Part V: Foreign-Owned U.S. DE Transactions

  1. Reportable Transactions
    • Check the box if you are a foreign-owned DE with other reportable transactions not included in Part IV. Describe these on an attached statement.

Part VI: Nonmonetary Transactions

  1. Description of Transactions
    • Attach a schedule describing each reportable nonmonetary transaction or group of transactions. Include property, services exchanged, and their fair market values.

Part VII: Additional Information

  1. Lines 40-43. Deductions and Loans
    • Report deductions disallowed under section 267A, FDII deductions, and details about loans with related parties.

Part VIII: Cost Sharing Arrangement

  1. Description and Allocation
    • Provide a description of each CSA, the reasonably anticipated benefits (RAB) share, and cost-sharing transaction payments.

Part IX: Base Erosion Payments

  1. Lines 50-52. Base Erosion Payments
    • Report base erosion payments, tax benefits, and qualified derivative payments.

Form 5472 is a vital tool for ensuring compliance with U.S. tax laws for foreign-owned U.S. corporations and foreign corporations engaged in U.S. business activities. Proper understanding of filing requirements, maintaining accurate records, and timely submission are essential to avoid significant penalties. For detailed instructions and updates, refer to the IRS Instructions for Form 5472.

By understanding and adhering to these requirements, corporations can navigate the complexities of international tax compliance and maintain good standing with the IRS. If you have any questions, don’t hesitate to contact us. We provide free tax consultations via email.

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