What is IRS 5472 Requirement for Foreign Investors?

What is IRS 5472 Requirement for Foreign Investors?

IRS 5472 Requirement for Foreign Investors?

Form 5472: The IRS form 5472 is different then most other international information returns. That is because unlike other offshore reporting forms that are used to disclose foreign assets held by US persons, the form 5472 is used to report US owned corporations or entities by foreign persons.  The term “Foreign Person” may include individuals and/or other corporations and businesses.  In recent years, the Internal Revenue Service has aggressively pursued international tax enforcement and reporting compliance. Unlike most other offshore reporting forms that carry a $10,000 penalty for noncompliance (excluding the FBAR), the form 5472 carries a hefty $25,000 penalty. Like most other IRS international reporting forms, this form can be very complicated — but here are five (5) important facts to know when completing the form.

What is a 5472 Reporting Corporation?

The IRS has developed very specific definition of what is considered a reporting corporation — and not all foreign-owned US corporations will meet the definition of a reporting Corporation.

Generally, if the US Corporation is owned 25% by a foreign person, then the first threshold for reporting will have been met.

Constructive ownership and Attribution rules apply.

Disregarded Entities

Foreign-owned US disregarded entities are not exempt.

In other words, a 25% foreign-owned US Corporation includes ownership of a US disregarded entity as well.

IRS 5472 Reportable Transactions

Not all foreign owned US corporations are required to file this form.

Rather, the business must have engaged in some reportable transactions that are identified on sections IV and VI of the form.

Some examples of reportable transactions, include:

  • sale of stock
  • sale of tangible property
  • rent received
  • commissions received

IRS 5472 Penalties and Reasonable Cause

As if a $10,000 penalty was not bad enough, the IRS significantly increased the noncompliance penalty all the way up to $25,000.

That is a pretty hefty penalty to pay for a foreign person who may not have any other reporting requirements in the United States.

It is important to note that while the penalty can be harsh, there are various amnesty programs available to assist taxpayers with safely getting into compliance, and reducing or eliminating, or avoiding the penalty.

The time to respond to a Form 5472 penalty notice is limited, so it is important for filers who have been hit with the penalty to respond timely to the penalty notice, in order avoid a more complicated abatement process.

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