IRS Form 5472: Filing Requirements and Tips
Are you required to file IRS Form 5472? For many expat business owners, the answer is yes. Here’s what you need to know.
Key Takeaways
- Form 5472 is required for US corporations with significant foreign ownership, foreign corporations (now known as foreign related party) engaged in US trade or business, and foreign-owned disregarded entities like LLCs.
- The form is used to report financial transactions between the business and its foreign shareholders to ensure tax compliance and transparency.
- Form 5472 is filed along with the company’s income tax return (Form 1120).
What Is Form 5472?
Form 5472 is used to report financial transactions between foreign shareholders and US corporations. The purpose of this form is to ensure transparency in the dealings of US entities with foreign interests, helping the IRS monitor for tax avoidance.
Latest Updates to IRS Form 5472 (Effective for 2024 tax year)
The IRS has released new instructions for Form 5472, including several significant changes. Here’s what filers need to know:
1. Changes to Part VII
- Line 39: Filers who respond “yes” to this question must now complete Part VIII.
- Line 41a: The term previously referred to as “foreign corporation” is now updated to “foreign related party.”
- Lines 42a and 42b: The IRS has introduced new questions to provide more clarity on safe-haven interest rate rules. These questions apply to loans involving related parties under Regulations section 1.482-2(a)(2)(iii)(B).
- Line 43a: Adjustments have been made to clarify reporting obligations concerning covered debt instruments and transactions with related parties.
2. Filing Instructions for Foreign-Owned US Disregarded Entities (DEs)
Foreign-owned US DEs, despite having no standard income tax return filing requirement, must attach Form 5472 to a pro forma Form 1120. They are required to follow these specific instructions:
- Dedicated Mailing Address: Internal Revenue Service 1973 Rulon White Blvd M/S 6112 Attn: PIN Unit Ogden, UT 84201
- Fax Submission: Forms can also be sent via fax at 855-887-7737.
- The phrase “Foreign-owned U.S. DE” must be written at the top of Form 1120 and Form 7004 when applicable.
Extensions for filing can be requested using Form 7004. However, the DE must follow the unique mailing and fax instructions provided, rather than the regular addresses for Form 7004.
3. Penalty Updates
- A $25,000 penalty applies for failure to file Form 5472 on time or to maintain required records. This includes filing an incomplete form.
- If the failure persists beyond 90 days after IRS notification, an additional $25,000 penalty is assessed for each 30-day period (or part thereof).
- Members of consolidated groups are treated as separate reporting corporations, meaning penalties apply individually to each member.
4. Electronic Filing Limitations
- Foreign-owned US DEs are not permitted to file Form 5472 electronically. They must use the designated mailing or fax options mentioned above.
Who Needs to File Form 5472?
There are three types of entities required to file Form 5472:
- US corporations with 25% or more direct or indirect foreign ownership
- Foreign corporations engaged in a US trade or business
- Foreign-owned US disregarded entities (such as an LLC)
Let’s look at some examples:
- A US corporation that is 33% owned by an investor in Germany would have to file Form 5472.
- A foreign corporation based in South Korea that sells products to the US would have to file Form 5472.
- A US-based LLC owned by a corporation in Canada would have to file Form 5472.
Key Information Required
Form 5472 requires various details about the corporation and its foreign shareholders. Some of the key pieces of information you’ll need include:
- Corporate structure and ownership: Names, addresses, and ownership percentages of foreign shareholders.
- Reportable transactions: Details of all financial transactions between the corporation and related foreign entities, including sales, rents, royalties, and loans.
- Country of incorporation and principal business activity.
Filing Requirements and Deadlines
To file Form 5472, you will:
- Determine eligibility: Confirm that your business has foreign shareholders or operates in the US as a foreign corporation.
- Gather necessary information: Collect corporate and transaction details, including ownership structure and financial dealings with related parties.
- Submit Form 5472: The form must be submitted with Form 1120 (your company’s income tax return).
The deadline for filing Form 5472 is the same as your company’s income tax return deadline, typically March 15. If you file for an extension for your Form 1120, it will also apply to Form 5472.
For more information, see the instructions for Form 5472 provided by the IRS.
Potential Penalties
Penalties for failing to file Form 5472 or for providing incorrect or incomplete information can be steep. The base penalty is $25,000 for failing to file on time, and an additional $25,000 penalty may be imposed for every 30 days the filing is late beyond a 90-day grace period.
Common Mistakes (and How to Avoid Them)
- Not filing for all reportable transactions: Some filers mistakenly believe that only monetary transactions need to be reported. However, non-monetary transactions such as loans or asset transfers must also be included.
- Overlooking small transactions: All reportable transactions, even those below $50,000, must be included. Failing to report smaller transactions can still lead to penalties.
- Not understanding foreign-related party rules: Failure to accurately identify and disclose transactions with foreign-related parties can lead to under-reporting. Ensure that all qualifying foreign parties and related transactions are reported.
- Failing to file for disregarded entities: Some businesses mistakenly think they don’t need to file Form 5472 if they’re a disregarded entity, but all foreign-owned DEs must file.
- Incorrectly calculating ownership percentages: It’s easy to miscalculate the 25% threshold for foreign ownership, especially when dealing with indirect ownership. Be sure to account for direct and indirect foreign shareholders.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.
FAQs
Can I file Form 5472 electronically?
Yes, you can file Form 5472 electronically via an IRS-approved e-filing system. If you are filing as a foreign-owned disregarded entity, you now need to file a proforma Form 1120 to include limited information, attach Form 5472 to Form 1120, and file Form 1120 electronically. Please note: Foreign-owned US DEs are not permitted to file Form 5472 electronically. They must use the designated mailing or fax options mentioned above.
What are reportable transactions for Form 5472?
You must report both monetary and non-monetary transactions, such as sales, rents, loans, and asset transfers, with foreign-related parties.
Can multiple Form 5472s be required for the same company?
Yes, if your company has multiple foreign shareholders, you may need to file separate Form 5472s for each foreign shareholder.
How About a Little Help? Greenback Can File Form 5472 for You!
Filing IRS Form 5472 is a critical requirement for foreign-owned US corporations and foreign corporations engaged in US business. However, foreign business taxes can get complicated fast. The good news? Greenback is here to help.
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