Simplifying the reporting requirements with the IRS Form 5472

Does your US entity have a foreign owner with at least 25% interest in the ownership? If yes, then read the following blog to navigate the complex reporting requirements by the IRS on Form 5472, non compliances for which can lead to penalties for $25000.

Background

IRS Form 5472 is a tax form used to provide information about certain related foreign corporations. It’s required to be filed by certain U.S. corporations that are 25% or more owned by a foreign shareholder or a foreign corporation engaged in a trade or business in the United States. The primary purpose of Form 5472 is to provide the IRS with information about transactions between the reporting corporation and its foreign owners or related parties. It helps the IRS in monitoring and evaluating transactions between related entities to ensure proper reporting and taxation.

Applicability of Form 5472 Reporting:

1. Domestic Corporations:
   • A U.S. domestic corporation is considered a reporting corporation if it is at least 25% foreign-owned at any time during the tax year. Ownership percentage is determined based on the total shares’ ownership, vote, or value.
   • For instance, if a U.S. corporation has a foreign individual, foreign corporation, or a combination of foreign owners that collectively own 25% or more of the total shares, vote, or value of the U.S. corporation, it becomes subject to the filing requirements of Form 5472.
2. Foreign Corporations Engaged in U.S. Trade or Business:
   • A foreign corporation that is engaged in a trade or business within the United States during the taxable year is also considered a reporting corporation and is required to file Form 5472.
   • The engagement in a U.S. trade or business includes activities like selling goods or services in the U.S., owning property that generates income in the U.S., or any other activity that constitutes conducting business in the country.
3. Controlled Transactions: Form 5472 is designed to report transactions that occur between the reporting corporation and its foreign owners or related parties. These transactions, known as “controlled transactions,” involve exchanges of money, property, or services and must be disclosed to the IRS.
4. Exceptions:
   • Some entities might be exempt from filing Form 5472 despite having foreign ownership. For instance, certain types of corporations, like publicly traded corporations, may not be required to file.
   • Additionally, transactions falling below a certain threshold might not need to be reported. However, the specifics of exemptions and thresholds can be intricate and may change based on IRS regulations.

Ownership Threshold Limit for Reporting:

The ownership threshold for Form 5472 refers to the percentage of foreign ownership in a U.S. corporation that triggers the reporting requirements for related transactions. Here are some key points about the ownership threshold:

1. 25% or More Ownership: The threshold is met if the total shares’ ownership, vote, or value in a U.S. corporation is at least 25% owned by foreign individuals, foreign corporations, or a combination thereof.
2. Calculation of Ownership Percentage: Determining the ownership percentage involves assessing the total ownership stake held by foreign entities. This includes direct and indirect ownership. Indirect ownership encompasses situations where foreign entities own shares through other corporations, partnerships, or trusts.
3. Aggregate Ownership: The ownership percentage is calculated based on the aggregated ownership interests held by all foreign persons related to the U.S. corporation. This means adding up the ownership percentages of all foreign individuals or entities related to the corporation.
4. Threshold Impact: Once the ownership threshold of 25% or more is met at any time during the tax year, the U.S. corporation becomes subject to the filing requirements of Form 5472 for that tax year. It’s essential to monitor ownership changes throughout the year to determine if the threshold is reached or exceeded.
5. Complex Ownership Structures: Determining ownership percentages can be complex, especially in cases involving intricate ownership structures or when ownership is held indirectly through multiple layers of ownership entities. These scenarios may require detailed analysis to accurately ascertain the ownership interests.

Reportable Transactions:

1. Types of Controlled Transactions: These transactions typically include, but are not limited to:
   • Sales or Purchases of Goods: Any exchange of goods between the reporting corporation and its foreign owners or related parties.
   • Services Provided or Received: Transactions involving services provided by the reporting corporation to related foreign parties or services received from these foreign entities.
   • Loans or Financial Arrangements: Any loans, advances, or financial arrangements, including interest payments, between the reporting corporation and its foreign owners or related entities.
   • Use of Intellectual Property or Tangible Assets: Transactions involving the use or licensing of intellectual property rights (patents, trademarks, copyrights) or tangible assets between the reporting corporation and related foreign entities.
   • Royalties, Rents, or Commissions: Payments or receipts of royalties, rents, or commissions for the use of property or services between the reporting corporation and its related foreign entities.
2. Required Information for Reporting Transactions: For each controlled transaction, Form 5472 typically requires the reporting corporation to provide:
   • Details about the related party involved in the transaction, including their name, address, country of residence, and ownership interest in the reporting corporation.
   • Description and nature of the transaction, specifying the type of transaction, the amounts involved, and any terms or conditions.
   • Information regarding the financial aspects of the transaction, such as the amounts paid or received, interest rates for loans, royalties, etc.
   • Any other pertinent details necessary to describe the transaction accurately.
3. Penalties for Inaccurate or Incomplete Reporting: Inaccurate or incomplete reporting of controlled transactions on Form 5472 can lead to penalties imposed by the IRS. Penalties can be significant, and the IRS may assess them on a per-item or per-failure basis.

Filing Deadline:

1. Due Date: Form 5472 is generally due on the same date as the income tax return of the reporting corporation. This means that for corporations filing on a calendar year basis, the due date is typically April 15 of the following year, unless that date falls on a weekend or holiday, in which case the deadline moves to the next business day.
2. Extensions: If the reporting corporation receives an extension for filing its income tax return, the deadline for filing Form 5472 is extended as well. This extension is typically granted using IRS Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
3. Timely Filing: It’s crucial to ensure that Form 5472 is filed on time to avoid potential penalties. Late filing or failure to file can result in penalties imposed by the IRS, which can accrue on a per-item or per-failure basis.
4. Documentation and Record-Keeping: The reporting corporation is also required to maintain proper documentation and records supporting the reported transactions. These records should be maintained for a specified period and should substantiate the accuracy and completeness of the information reported on Form 5472.

Consequences of Late Filing:

Penalties for late filing can be significant and may vary based on the specific circumstances. The IRS may impose penalties for each month or part of the month that the Form 5472 is late, and these penalties can accumulate until the form is filed.

Penalties for Non-Compliance:

1. 1. Failure to File Penalty: If a reporting corporation fails to file Form 5472 by the due date, including any extensions, the IRS may impose a penalty. As of my last update, the penalty for failing to file or for filing an incomplete or inaccurate form was $25,000 per year.
   2. Inaccurate or Incomplete Information Penalty: Providing inaccurate or incomplete information on Form 5472 may also lead to penalties. The IRS can assess penalties for each failure to provide accurate and complete details on the form.
   3. Continued Failure to File: If a reporting corporation continues to fail to file Form 5472 after receiving notification from the IRS, additional penalties can accrue. The IRS may increase penalties for continued non-compliance.
   4. Penalty Mitigation: The IRS may consider reasonable cause for failure to file or inaccuracies on the form when determining penalties. However, this is subject to IRS discretion, and corporations should ensure they have valid reasons for any failure to comply.

1. Per-Item or Per-Failure Basis: Penalties for non-compliance can be assessed on a per-item or per-failure basis. This means that each failure to report a transaction accurately or each instance of non-compliance can result in a separate penalty.

How we can help?

Our COO Anshul Goyal has vast experience on US taxation and International Tax Reporting requirements with the IRS, holding AICPA international tax certifications and has handled complex reporting requirements with the IRS making the US entities compliant on these critical reporting requirements.

Have Questions? Reach Anshul Goyal at anshul@kkca.io or call him at +1 3235225584 for expert guidance and support. Let’s optimize your tax strategy for success!