If you are a foreigner owning a U.S. corporation or a U.S. disregarded entity, Form 5472 will apply to you. A new memo from the IRS Office of Chief Counsel changes how penalty abatement requests are reviewed. You will learn what the memo says and why some common excuses no longer work.
What Is Form 5472 and Who Must File It?
Form 5472 is an information return. It reports transactions between a reporting corporation and a foreign or domestic related party.
You must file it if your U.S. corporation is 25 percent or more foreign-owned. You must also file it if you own a foreign-owned U.S. disregarded entity. A disregarded entity is a business, often a single-member LLC, that is not treated as separate from its owner for tax purposes.
For a full breakdown of related forms, see our guide to U.S. tax forms for foreign-owned businesses.
What Happens If You Miss the Deadline?
Failing to file Form 5472, or filing it late or incomplete, triggers a penalty under Internal Revenue Code Section 6038A(d). The penalty is $25,000 per form, per tax year. This can add up quickly if more than one form is required as in a multi-member LLC.
The IRS can also impose the penalty on foreign corporations engaged in a U.S. trade or business under Section 6038C. Each month the failure continues after IRS notice can add more penalty.
You can ask the IRS to remove the penalty. This is called penalty abatement. Reasonable cause is the standard defense. It means you exercised ordinary business care but still could not file on time.
What Changed in the Chief Counsel Memo?
The Office of Chief Counsel issued a memo that narrows how reasonable cause is evaluated for Form 5472 penalties. Before this memo, taxpayers had more room to argue general circumstances.
Under the new guidance, you generally need one of two things. You need reasonable cause that covers the entire filing period, such as a serious illness that prevented you from filing at any point. Alternatively, you need to satisfy all four factors set out in the memo. Meeting only one or two of the four is not enough.
One of those four factors is absence of knowledge. This means you did not know, and had no reason to know, about the Form 5472 filing requirement.
Why Absence of Knowledge Often Fails
Absence of knowledge sounds like an easy defense. It is not available to everyone, and because the memo requires all four factors, failing this one factor can sink the entire abatement request.
If you filed Form 5472 in a prior year, you cannot claim you did not know about the requirement. The IRS treats your prior filing as proof of knowledge. This defeats the absence of knowledge factor, which in turn defeats the four-factor path for later years.
This matters for owners who filed once, then missed a later year. A gap in filing does not reset your knowledge. The IRS Chief Counsel memo treats your filing history as evidence against you, and it can eliminate the four-factor path entirely.
What Reasonable Cause Still Looks Like
Reasonable cause is a fact-specific test. The IRS looks at what you did, and when you did it, not just what you intended.
Two paths may support abatement:
- Illness or incapacity that lasted through the entire filing period
- Meeting all four factors in the memo, including absence of knowledge, which only works if you have never filed before.
If you have filed before, plan on a harder path to abatement. The four-factor path is closed to you, so your case will likely need to rest on reasonable cause covering the full filing period.
Cross-border ownership also raises related questions about effectively connected income, which is income connected to a U.S. trade or business and taxed on a net basis. Getting your filing position right up front reduces your exposure to this kind of penalty dispute.
Plan Ahead
Review your Form 5472 filing history before you respond to any IRS penalty notice. Check whether you filed in a prior year, since that fact alone can close off the four-factor path.
If you have a foreign-owned U.S. entity and you missed a filing, gather your records now. Contact Acully Incorporated to review your cross-border tax position before you file.
This article is for general information only and is not tax, legal, or accounting advice. Reading it does not create a client relationship with Acully Incorporated. Contact us to discuss your specific situation.
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