Late Form 5472: the penalty and how to ask for relief

How does the Form 5472 penalty work?

The IRS assesses $25,000 against a reporting corporation, including a foreign-owned US disregarded entity, that fails to file Form 5472 when due and in the manner required. The same penalty applies to failing to keep the required records. A substantially incomplete form counts as not filed. If the failure continues more than 90 days after the IRS notifies the company, a further $25,000 applies for each related party for each 30-day period, or part of one, that it continues. See the Form 5472 guide.

The penalty is not a percentage of tax. It applies in full even if the company owed nothing and the form would have reported a single $1,000 contribution.

Does first-time abatement help?

No. The IRS's first-time abatement policy covers failure to file, failure to pay and failure to deposit penalties on tax returns. The Form 5472 penalty is an international information return penalty under a different section of the tax code and is not on that list. Relief depends on reasonable cause.

What counts as reasonable cause?

Reasonable cause means you exercised ordinary business care and prudence and still could not file on time. Facts that support it include:

• relying in good faith on a tax professional who advised that no filing was needed, where you gave them the full facts,
• serious illness, death in the family or a disaster at the time the form was due,
• records destroyed or unavailable despite reasonable efforts,
• prompt action to file and comply as soon as you learned of the requirement.

Not knowing about the requirement is rarely enough by itself. It carries more weight combined with other facts, such as having no US advisers, relying on a formation service that said nothing, and filing every missing year promptly once aware.

The general standard is explained in reasonable cause penalty abatement.

What goes in the reasonable cause statement?

1. The facts

   Who owns the company, when it was formed, what it does, and what transactions it had with its owner.

2. Why the form was not filed

   The specific reasons, with dates, not general statements.

3. When and how you found out

   And how quickly you acted after that.

4. What you have done since

   The missing forms filed, systems put in place, advisers engaged.

5. A signed declaration

   Signed under penalties of perjury by a person with authority, with supporting documents attached.

How should the late forms be filed?

File a complete pro forma Form 1120 and Form 5472 for each missing year, using that year's forms, with the reasonable cause statement attached. See pro forma Form 1120. The IRS runs a procedure for taxpayers who are not under examination to file delinquent international information returns with a reasonable cause statement. Be aware that the IRS can still assess the penalty when it processes late forms, in which case relief is pursued in response to the notice and, if refused, through the IRS Independent Office of Appeals. Because the stakes are high, take professional advice before filing several years at once.

What if you have already received a penalty notice?

Respond by the date on the notice with your reasonable cause statement and evidence. If the IRS rejects it, you can ask for review by the Independent Office of Appeals. Keep copies of everything and proof of when you sent it.

How do you avoid it next year?

• Put April 15, and October 15 if you extend, in your calendar. See every yearly filing for a foreign-owned LLC.
• Keep a running log of every transfer between you and the LLC.
• File Form 7004 on time if you need more time. See Form 7004.

This guide is general information. It is not tax or legal advice for your situation.