IRS Foreign Disclosure Requirements: Form 5472by kyoffelaw
Foreign corporations engaged in a U.S. trade or business and U.S. corporations with more than 25% foreign ownership are required to file Form 5472 with the IRS. The purpose of Form 5472 is to provide certain information to the IRS when a “reportable transaction” occurs (such as sales, rents, royalties, interest) between a reporting corporation and a related party. This disclosure requirement is not limited only to transactions between a reporting corporation and its 25% foreign shareholder but also extends to transactions with foreign entities that are related to the foreign 25% shareholder.
A separate Form 5472 is filed for each foreign or domestic related party with which the reporting corporation engaged in a reportable transaction during the year.
The 25% ownership requirement is generally applied to a foreign person owning 25% of a US corporation either directly or indirectly (via other entities). If certain conditions are met Form 5472′s disclosure requirements may not apply to multiple foreign persons owning 25% of a US corporation in the aggregate. Form 5472 is often overlooked when a foreign owner of a U.S. company is a silent partner. It is important to keep in mind that if such foreign ownership exists it does not matter what role the foreign owner has in the US company.
Form 5472 must be filed with a reporting corporation’s annual tax return. It is extremely important that a 5472 be filled out properly. As of 2013 the IRS is now assessing an automatic $10,000 penalty for failing to file the form on time and an additional $10,000 for every subsequent year that the form is not filed. A substantially incomplete Form 5472 may be considered by the IRS as constituting failure to file. Furthermore, the IRS uses Form 5472 as a starting point for inquiring into transfer pricing. Forms filed correctly and in a timely manner not only ensure that reporting corporations avoid penalties but also aids in reducing IRS audit risk.