Form 5472 -Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business











We've had several enquiries about Form 5472 by some of our Asian based investors into the US. Therefore it is natural that it be the subject of my next blog entry.

As of 2015, over 6.8 million United States (US) workers were employed by foreign-owned companies. To ensure that foreign investment and foreign business activity is reported and taxed, Internal Revenue Code (IRC) §§ 6038A and 6038C impose reporting and substantiation requirements
on foreign-controlled businesses. 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, is used to report the
information required under IRC §§ 6038A and 6038C. The consequence for failing to file IRS
Form 5472 includes the denial of deductions for payments to related parties, an initial $25,000
failure to file penalty, and continuation penalties of $25,000 per 30-day period until the taxpayer gets
into compliance. Below, we review the reporting and record-keeping requirements of Foreign-
Owned U.S. Corporations and Foreign Corporations doing business in the US.


That related-party transactions (as defined by I.R.C. § 6038A(b) which is discussed further in the following section) should be subject to extra scrutiny is not unique to foreign business activity. Transfer pricing examinations under IRC § 482 are routine. Historically, the IRS had trouble obtaining transfer pricing data from foreign companies.

The reporting and recordkeeping requirements of IRC §§ 6038A and 6038C were intended to reduce transfer pricing abuses and assist the IRS in examining related-party transactions involving foreign investors and corporations. A US business that is foreign-owned is subject to IRC §6038A. Foreign corporations with US operations are governed by IRC § 6038C.

IRC § 6038A “Information with respect to foreign-owned corporations” provides:
If, at any time during a taxable year, a corporation . . .
(1) is a domestic corporation (in accordance with I.R.C. § 7701(a)(3) & (a)(4)), and
(2) is 25-percent foreign-owned, such corporation shall furnish, at such time and in such manner as the Secretary shall by regulations prescribe, the information described in sub-section (b) and such corporation shall maintain . . . such records as may be appropriate to determine the correct treatment of transactions with related parties as the Secretary shall by regulations prescribe. . . .IRC § 6038C, “Information with respect to foreign corporations engaged in U.S. business,” provides: If a foreign corporation . . . is engaged in a trade or business within the United States at any time during a taxable year–
(1) such corporation shall furnish . . . the information described in subsection (b) and
(2) such corporation shall maintain . . . such records as may be appropriate to determine the liability of such corporation for tax under this title as the Secretary shall by regulations prescribe . . . .

Despite the statutory separation, the two tax provisions share the same regulations (i.e., those under IRC § 6038A), and corporations subject to either provision must supply the IRS with information each year on Form 5472. The regulations treat domestic disregarded entities, which are wholly owned by a foreign person, as US domestic corporations for Form 5472 filing purposes.

Disregarded entities must submit the Form 5472 with a pro forma Form 1120.



IRC § 6038A, Treas. Reg. § 1.6038A-1, and the Who, What, When, and Where of Filing Form 5472.
The Form 5472 requests information the IRS deems necessary to investigate whether foreigners are manipulating related-party transactions and consequently decreasing US tax revenues. To this end, Form 5472 requires identifying information from reporting corporations and 25% foreign shareholders. Regarding what information must be provided, IRC § 6038C(b)(1) adopts the requirements of IRC § 6038A(b), which include:
1. the name;
2. principal place of business;
3. nature of the business; and
4. the country or countries in which each related party—with any transaction with the reporting corporation—is organized or resides.

Once the related party is listed, information regarding how the reporting corporation is related to each related party must be provided. Then, any transactions between the reporting corporation and each foreign person which is a related party must be detailed.

IRC § 6038A and Treas. Reg. § 1.6038A-2 through 1.6038A-7 detail which foreign-owned US corporations and foreign corporations engaged in trade or business within the US must file Form 5472, what records must be maintained, and what information must be available for audit.
IRC § 6038A(c)(1) defines a reporting corporation required to file Form 5472 (sometimes the “Taxpayer”) as a domestic corporation that is 25-percent foreign-owned. Foreign-owned means ownership by one foreign person of either 25 percent of the voting stock or 25 percent of the value of all classes of the domestic corporation's stock. A "foreign person" is any person who is not a "United States person" under IRC § 7701(a)(30). The attribution rules, under IRC § 318, apply when determining if a corporation is 25-percent foreign-owned and whether someone is a related party for IRC § 6038A purposes. Form 5472 is also required from each foreign or domestic related party with which the reporting corporation had a reportable transaction.

Under IRC § 6038A(b), the term related party means:
1. any 25-percent foreign shareholders of the reporting corporation;
2. any person related, as defined by § 267(b) and 707(b)(1), to the reporting corporation or to a 25-percent foreign shareholder of the reporting corporation; and,
3. any other person related to the reporting corporation, as defined under § 482.

Reportable transactions are defined in Treas. Reg. § 1.6038A-2(b)(3)&(4). Related-party transactions reported on Form 5472 include:
1. sales or stock or property;
2. commissions paid and received;
3. rents and royalties paid;
4. consideration for services; and
5. amounts loaned and borrowed.


  • There is a Small Amounts Exception - Treas. Reg. § 1.6038A-2(b)(7) provides that, “[i]f any actual amount required under this section does not exceed $50,000, the amount may be reported as “$50,000 or less.” 
  • The Preparer May Use Reasonable Estimates - Treas. Reg. § 1.6038A-2(b)(6)(i) provides that “[a]ny amount reported under this section is considered to be a reasonable estimate if it is at least 75 percent and not more than 125 percent of the actual amount.” 
  • There is a Small Corporation Exception that Excuses Some Recordkeeping Requirements.  Reporting corporations with less than $10,000,000.00 in gross receipts for a taxable year must file a Form 5472 but they are excused from the heightened record maintenance requirements in Treas. Reg. § 1.6038A-3 and the requirement to have an authorized agent, under Treas. Reg. § 1.6038A-5.
  • The How, When, & Where of Filing Form 5472 - Form 5472 is due on the due date of the Taxpayer’s Form 1120, including extensions. Form 5472 should be attached to the corporation’s income tax return on the filing deadline, which also includes extensions. Disregarded entities cannot file their Form 5472 electronically. Form 5472 should be attached to the Form 1120 and filed either: electronically; via fax (300 DPI or higher) to (855) 887-7737; or mailed to Internal Revenue Service, 201 West Rivercenter Blvd., PIN Unit, Stop 97, Covington, KY 41011. 



The Penalty for Failing to File Form 5472 Starts at $25,000 

Failure to file Form 5472 can result in a penalty of $25,000.00 per year (was $10,000.00 prior to 2018).  There is also a continuation penalty. This means that if the Taxpayer does not file a substantially complete Form 5472 within 90 days of being notified to do so by the IRS, the IRS can assess an additional $25,000.00 penalty for each 30-day period that the taxpayer fails to cure t
he failure to file. Unlike other continuation penalties, there is no limit to the continuation penalty for a failure to file Form 5472.

The Fifth Amendment implications of this penalty are beyond the scope of this overview.  The $25,000 Penalty Applies to Forms 5472 that are Not Substantially Complete Treas. Reg. § 1.6038A-4(a)(1) memorializes the IRS’s position that filing a Form 5472 that is not “substantially complete” (i.e., a substantially incomplete filing) should be penalized as a failure to file.

By contrast, Treas. Reg. § 1.6038A-2(b) provides:
(6) Reasonable estimate -
(i) Estimate within 25 percent of actual amount. Any amount reported under this section is considered to be a reasonable estimate if it is at least 75 percent and not more than 125 percent of the actual amount.
(ii) Other estimates. If any amount reported under this paragraph (b) of this section fails to meet the reasonable estimate test of paragraph (b)(6)(i) of
this  section,  the  reporting  corporation  nevertheless  may  show  that such amount is a reasonable estimate by making an affirmative showing  of  relevant  facts  and  circumstances  in  a  written  statement  containing  a  declaration  that  it  is  made  under  the  penalties  of  perjury.  The  District  Director  shall  determine  whether  the  amount  reported  was  a reasonable estimate.

(7)  Small amounts. If any actual amount required under this  section does not exceed $50,000, the amount may be  reported as “$50,000 or less.”

Against this background, whether an item “under or over-reported” on a Form 5472 renders the Form 5472 “substantially incomplete” is determined case by case considering the safe harbors provided by regulation.   The IRS guidance suggests that the tax professional contesting the penalty should perform a  two-prong balancing test: 
(1) what is the magnitude of the errors
and
(2) what is the effect of the noncompliance on the IRS ability to audit the information as required by statute and regulations.
Stated another way, tax professionals should argue that the regulations on whether a Form 5472 complies or substantially complies with the statute and regulations essentially incorporates the Beard test for whether a return is validly filed, as adopted by the Tax Court in Beard v. Commissioner, 82 T.C. 766 (1984).



The IRS rarely applies the First Time Abatement procedure to Form 5472 based penalties

Many have reported that the IRS has been automatically imposing Form 5472 penalties whenever a Forms 5472 is filed late. This automatic penalty is authorized by IRM 21.8.2.21.2 (4-28-2017). The automatic penalty assessment causes the IRS to issue a CP 215 notice to the taxpayer. The CP 215 notice starts the collection process. Tax professionals  receiving  CP  215  notices  should  file  a  request under  the  Freedom  of  Information  Act  (“FOIA”)  requesting verification of the IRS’s compliance with IRC § 6751(b)’s managerial approval requirement.

The  first-time  abatement  (FTA) penalty  relief  provisions  rarely  apply  to  event-based  filing requirements,  such as with Form 5472.  However, the IRM authorizes abatement of the Form 5472 penalty if the related abatement on the Form 1120 was made using FTA.  The Penalty Can Be Excused or Mitigated on a Showing of Reasonable Cause IRC  §  6038A(d)(3)  and  Treas.  Reg.  §  1.6038A-4(b)(1)  provide  that  “[c]ertain  failures  may  be  excused  for reasonable cause, including not timely filing Form 5472, not maintaining or causing another to maintain records as required by § 1.6038A-3.”   To show that reasonable cause exists, Treas. Reg. § 1.6038A-4(b)(2) requires that the Taxpayer make an affirmative showing of the facts in a written statement signed by the Taxpayer and submitted under penalties of perjury.   Treas. Reg. § 1.6038A -4(b)(2)(iii) explains that the IRS determines whether a taxpayer acted with reasonable cause and in good faith on a case-by-case basis, considering all facts and circumstances.   Under Treas. Reg. § 1.6038A-4(b)(2) reasonable cause includes but is not limited to:

1.   Reliance on an information return;
2.   Professional   advice;  
3.   A reasonable belief that the reporting corporation it is not owned by a 25-percent foreign share-
holder; and
4.    An  honest  misunderstanding  of  fact  or  law  that  is  reasonable  in  light  of  the  experience  and 
knowledge of the taxpayer.

Small  taxpayers  requesting  penalty  abatements  should  direct  the  examiner’s  attention  to  Treas.  Reg.  §1.6038A-4(b)(2)(ii) which provides: 
  • ·         The District Director shall apply the reasonable cause exception liberally  in  the  case  of  a  small  corporation that had no knowledge of the requirements imposed by section 6038A;
  • ·         has limited presence in and contact with the United States; and promptly and fully complies with all requests by the  District  Director  to  file  Form  5472,  and  to  furnish  books,  records,  or other materials relevant to the reportable transaction. 
  • ·         A  small  corporation is   a   corporation whose   gross   receipts   for   a   taxable   year   are   $20,000,000 or less.  


Tax professionals preparing reasonable cause statements should address the items referred to IRM Exhibit 21.8.2-2, Failure to File or Late-Filed Form 5472-Decision Tree.

The Statute of Limitation to Penalize a Taxpayer and/or Audit a Form 5472 does not begin until the
Form 5472 is filed.  Besides the penalties resulting from not filing or late filing Forms 5472, failing to file Form 5472 extends the time that the IRS has to audit the taxpayer’s return.   

Effective for tax years beginning after March 18, 2010, IRC § 6501(c)(8) states: 
·         In the case of any information which is required to be reported to the Secretary  pursuant  to  under.  .  .  section[s]  .  .  .  6038,  6038A,  6038B,  6038D,  6046, 6046A, or 6048, the  time  for  assessment  of  any  tax  imposed  by  this title with respect to regarding any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
·         The statute of limitations for tax returns requiring a Form 5472 does not begin until the Form 5472 is filed.  Failure to file Form 5472 thus risks giving the IRS an indefinite amount of time to assess penalties against the taxpayer.

The Recordkeeping Requirements of IRC § 6038A and IRC § 6038C have procedural and substantive due process consequences for the examination of Taxpayers Tax professionals accustomed to domestic substantiation cases will quickly observe that the first difference between the examination of a domestic and foreign corporation is that IRC § 6038A imposes a penalty for failure  to  maintain  (or  cause  another  to  maintain)  records  as  required.

Failure  to  maintain  adequate  records also comes with a $25,000.00 penalty per year.   The IRC § 6038A penalty is also subject to a limitless  continuation  penalty.  The  penalties  for  failing  to  maintain  records  in  IRC  §  6038C  which  applies  to  foreign  corporations  engaged  in  US  trade  or  business  mirrors  the  language  and  requirements  of  IRC  §  6038A.   Penalties,  including  continuation penalties,  for  violations  of  both  failure  to  file  and  failure  to  maintain  adequate  books  and  records  can  run  concurrently;  meaning  that  if  a  foreign-owned  US  corporation  does  not comply with both, it will be subject to two $25,000 penalties and to potentially double continuation penalties, which would amount to $50,000 per 30-day period.

Professionals representing small corporations should know that although small corporations must maintain records to substantiate deductions, they are exempt from penalties for failure to maintain these records.  Likewise, reporting corporations making or receiving gross payments from foreign
related parties regarding related party transactions will not be penalized for a failure to maintain records (or for a failure to authorize an agent under Treas. Reg. § 1.6038A-5) if the value of the transactions is not more than $5,000,000.00 or 10% of the company’s U.S. gross income.

The second difference between the examinations in domestic substantiation cases and cases involving foreign corporations is the IRS’s claim that the Cohan Rule (which allows the estimate of an expense where the taxpayer has established that the expense is a business expense but cannot prove the amount of the expense)  does not apply.  The IRS’s position results from the tension between
Treas. Reg § 1.6038A-2’s authorization of “reasonable estimates”  for  return  preparation  and  the  IRS  discretion  to  reduce  or  deny  the  deduction  for  any  amount  paid or incurred by Taxpayer to a related party when the taxpayer has not kept “adequate records.”

As explained above, for purposes of determining whether a Form 5472 is filed, Treas. Reg. § 1.6038A-2(b) (6) authorizes a tax preparers use of reasonable estimates.  In traditional audits, the tax professional argues that  under  the  Cohan  Rule  taxpayers  unable  to  produce  records  of  actual  expenditures  may  use  indirect  methods to substantiate their estimates and deductions.

By contrast, in the absence of books and records, IRC § 6038A(e)(3) allows the IRS to determine, in its sole discretion:  
(A)  the  amount  of  the  deduction  allowed  under  subtitle  A  for  any  amount  paid  or  incurred  by  the  reporting  corporation  to  the  related  party  in  connection with such transaction, and
(B)  the  cost  to  the  reporting  corporation  of  any  property  acquired  in  such transaction  from  the  related  party  (or  transferred  by  such  corporation  in  such transaction to the related party).

IRS examiners contend that absent records, IRC § 6038A(e)(3) gives the IRS the discretion to reduce or deny the deduction for any amount paid or incurred by Taxpayer to a related party based on the  failure  to  maintain  adequate  records.  The  IRS  claims  that  the  noncompliance  penalty  of  IRC  §6038A(e)(3)  also  applies  in  the  case  of  a  failure  to  substantially  and  timely  comply  with  a 
summons to produce records or testimony during the examination.  There are no reported cases on whether the Tax Court can review the reasonableness of the IRS’s exercise of discretion or on what the limits of that exercise of discretion might be.  

Read together IRC § 6038A(e)(3) and IRC § 982 mean that failing to comply with the formal document requests issued by the IRS during an examination will preclude de novo review of an IRS determination.  Another  major  difference  in  the  Form  5472  examination  is  the  document  request  process.  Document  requests in domestic examinations are not self-enforcing. If a taxpayer ignores or refuses to comply with an IDR or a summons, the IRS must bring a proceeding in US District Court to obtain the documents. The taxpayer’s failure to comply with an IRS document request had little consequence if the taxpayer petitioned the Tax Court.  In Greenberg's Express, the Tax Court held that the Tax Court trial is a de novo proceeding in which the administrative record is irrelevant.

In Form 5472 examinations the IRS is authorized by IRC § 982(c)(1) to issue a Formal Document Request (FDR) to any taxpayer to request foreign-based documentation. An  FDR  is  "any  request  (made  after  the  normal  request  procedures  have  failed  to  produce  the  requested documentation) for the production of foreign-based documentation which is mailed by registered or certified mail to the taxpayer at his last known address and which sets forth" certain information.   Documentation includes books and records; "foreign-based documentation" is defined as "any documentation  which  is  outside  the  United  States  and  which  may  be  relevant  or  material  to  the  tax  treatment  of  the examined item." IRC § 982(d)(1), (2). 

The FDR discourages taxpayers from delaying or refusing to disclose certain foreign-based information to the IRS.   If the taxpayer fails to substantially comply with  the FDR within 90 days of the mailing of the request and fails to bring a proceeding to have the FDR quashed, the statute imposes an exclusionary rule. In any subsequent civil proceeding concerning the tax treatment of an examined item, the court then having jurisdiction, on motion of the IRS, can prohibit the taxpayer from introducing any foreign-based documentation  covered  by  the  FDR.

An  exception  to  this  exclusionary  rule  will  apply  if  the  taxpayer  establishes  in  that subsequent civil proceeding reasonable cause for non-compliance with the FDR.  Any person mailed an FDR may begin a proceeding to quash the FDR if the proceeding is filed within 90 days after the FDR was mailed.

If the taxpayer files a proceeding, the Secretary may seek to compel compliance with the FDR in the same proceeding. If the taxpayer files a petition to quash the FDR but does not prevail, res  judicata  (which  is  a  legal  doctrine  that  prevents  litigants  from  re-litigating a  previously  litigated matter or issue) applies so that the exclusionary rule will apply in any such subsequent civil proceeding if the taxpayer continues to fail to substantially comply with the FDR.  Appeals Considers Challenges to Form 5472 Penalties Post Assessment IRC  §  6038A(d)  authorizes  the  IRS  to  assess  applicable  penalties  without  first  sending  a  notice  of  deficiency. Existing procedures provide for the automatic assessment of the Form 5472 penalty. Appeal rights for Form 5472 are post-assessment pre-payment penalty rights.

IRC § 6751(b) provides: “No penalty under [the I.R.C.] shall be assessed unless the initial determination of such  assessment  is  personally  approved  (in  writing)  by the  immediate  supervisor  of  the  individual  making  such determination or such higher level official as the Secretary may designate.” To comply with IRC § 6751(b), the initial penalty is asserted on a Form 8278, Assessment and Abatement of  Miscellaneous  Civil  Penalties.  Once  this  Form  8278  is  processed, the  taxpayer  will  be  sent  a  CP215,  Notice of Penalty Charge.   The collection process begins, regardless of whether the taxpayer includes with the late Forms 5472 a statement of reasonable cause or a Form 843 request for abatement.

If the taxpayer does not pay the penalty after the CP 215 notice, the IRS sends a CP 504B, Notice of intent to  seize  (levy)  your  property  or  rights  to  property,  pursuant  to  IRC  §  6330.    This  notice  provides  the  taxpayer with the option of pursuing an Appeals conference, by filing a Form 9423, Collection Appeal Request.  More importantly, a taxpayer can also file a Form 12153, Request for a Collection Due Process or Equivalent Hearing.  To request Appeals Office consideration of the penalty and preserve the taxpayer’s rights for Tax Court prepayment review of the penalty, the taxpayer should request a de novo review of the penalty by requesting a Collection Due Process Hearing on Form 12153. The  Form  12153  should  also  request  that  the  Appeals  Office  verify  compliance  with  IRC  §  6751(b).  Form  5472 based penalties must be approved, in writing, by the revenue agent’s manager, under IRC § 6751(b).

The manager must approve the case-control, sign the notice letters, and approve the penalty by signing the Form  8278  prior  to  closing  the  case.  Tax  professionals  challenging  the  Form  5472  based  penalty  should  request that the Appeals Office verify the IRS compliance with IRC § 6751(b).  To  obtain  an  expedited  hearing,  along  with  the  Form  12153,  the  taxpayer  should  submit  a  Qualified  Offer  under IRC § 7430.  IRM 8.7.15.1.4 (10-01-2012) provides that cases with qualified offers must be expedited and the Appeals Office will try to resolve the issues within 90 days of when the qualified offer is filed.
 
Substantive Tax relating to Form 5472 Tax Deficiency are Litigated In Deficiency Proceedings While
Penalty  Appeals  are  Litigated  in  Post-Collection  Due  Process  Hearing  Litigation  Before  the  Tax Court If the IRS examination of Forms 5472 results in a deficiency determination, the taxpayer can file a petition for redetermination of the deficiency in the Tax Court. To date, the Tax Court has only issued one opinion: ASAT, Inc. v. Comm’r, 108 T.C. 147 (1997).   ASAT reinforces the importance of recordkeeping and internal controls: Section 6038A was enacted to insure that the IRS would have either timely access to the information necessary to make a complete analysis of costs between related parties or the right to make an adjustment based solely on the information that it did have.

Whether  the  taxpayer  can  later  justify  a  cost is irrelevant:  Accordingly,  the  amounts  establish
ed  by  the  Secretary  cannot  be  overturned by a court on the basis that they diverge from actual costs or other amounts  incurred,  or  on  the  basis  that  they  do  not  clearly  reflect  income.   The fact that amounts established by the Secretary can be proven to be  clearly  erroneous,  by  reference  to  information  or  materials  that  were  not  within  the  Secretary's  knowledge  or  possession,  would  not  alone, in the conferees' view, be sufficient cause for a court to redetermine  allowable  amounts  of  deductions  and  the  costs  of  goods  sold. * * * [H. Conf. Rept. 101-386, at 594 (1989).]

By contrast, the Form 5472 compliance-related penalties are not subject to the notice of deficiency requirement in IRC § 6212 (i.e., the penalties are immediately assessable). If the taxpayer disagrees with the Appeals Office’s determination made at the Collection Due Process hearing, the taxpayer may appeal to the US  Tax  Court.  The  Tax  Court  is  the  only  post-assessment  pre-payment  forum  available  outside  of  bankruptcy.  Under IRC § 6330, a taxpayer has 30 days from the IRS’s determination (which must be left at taxpayer’s dwelling or sent by certified or registered mail to the taxpayer’s last known address) to petition for relief in Tax Court.

To initiate a Tax Court case, the taxpayer (now known as petitioner) will file a petition, designation for place of trial, and a statement with the taxpayer’s identification number, which will accompany a filing fee of $60 (made payable to Clerk, US  Tax Court).   Petitions must include, among other items, facts and legal theories on why the petitioner should prevail. Any issue not contested in the petition is deemed conceded by petitioner (except for statutorily required issues, such as § 6751(b) compliance). Also, the notice being appealed must be attached and any taxpayer identification numbers (such as social security number) must be redacted. Form 5472 Litigation before the US Court of Federal Claims or the US District Court Except for litigation about FDRs, most tax litigation relating to Form 5472 is brought by taxpayers in the Tax Court because it is a pre-payment forum.  However, some taxpayers may want to litigate in the US Court of Federal  Claims  or  the  US  District  Court.    Before  commencing  suit  in  these  courts,  the  taxpayer  must  first  pay the tax and file a claim for refund from the IRS.

Claims for refund must include the grounds on which a refund is claimed and facts to support those grounds; all of which must be sworn to under penalties of perjury. There are no reported cases from US Court of Federal Claims or the US District Court that would allow us to opine on whether the refund litigation pertaining to Form 5472 is preferable to litigation before the Tax Court.


 
DIIRSP and Correcting the Failure to File a Form 5472

The Delinquent International Information Return Submission Procedure (“DIIRSP”) allows eligible taxpayers to correct their failure to file, as opposed to failure to comply with the record-keeping requirements, without penalty.  DIIRSP allows taxpayers who are not compliant to file late returns if these criteria are met: 
1.   the taxpayer did not file one or more
required international information returns;
2.   the taxpayer has a reasonable cause for
not timely filing the information return;
3.   the taxpayer is not under a civil examinati
on or criminal investigation by the IRS; and
4.   the IRS has not already contacted t
he taxpayer regarding the delinquent return.

If a taxpayer has not filed a Form 5472, due to a reasonable cause, and the IRS is neither investigating him nor has contacted him, then he can file his delinquent returns without being penalized.  The delinquent returns must be filed with a reasonable cause statement. This reasonable cause statement should  include  a  certification  that  the  foreign  entity  was  not  engaged  in  tax  evasion.  Reasonable  cause  statements  should  be  attached  to  every  delinquent  return  being  filed.  If  the  IRS  does  not  accept  the  taxpayer’s reasonable cause then a penalty may apply. Anecdotal data suggests that the IRS is applying reasonable cause liberally when delinquent Forms 5472 are filed under the DIIRSP procedure.



Conclusion

One of the major trends in tax practice is the globalization of small business.  To address the challenges of international  tax  administration,  the  IRS  has  increased  its  enforcement  efforts  on  international  information  reporting  and  recordkeeping  requirements  and  increased  assessments  of  related  penalties.  Until  recently,  taxpayers,  and  many  tax  preparers,  were  unaware  of  the  additional  compliance  obligations  resulting  from foreign investment in a domestic corporation or foreign business activity. The increased enforcement efforts together  with  the  increased  cost  of  non-compliance  (i.e.,  penalties)  now  requires  taxpayers  to  understand the reporting and recordkeeping requirements associated with 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


Source: Agostino & Associates, Monthly Journal of Tax Controversy, April 2018





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