Doing Business In America? Don't Forget Form 5472 Or Risk Penalties
The United States is an attractive place for entrepreneurs and investors from around the globe for various reasons. It provides access to a huge consumer base, strong legal protections, and a thriving system for startups. Less obvious are the various U.S. tax and information filings that are required when foreign businesses set foot in America.
This article addresses a lesser-known IRS filing requirement that could cost $25,000 per year (or more) in penalties if it is overlooked. Every year, many foreign owners of U.S. businesses risk steep penalties because they miss this important filing, IRS Form 5472.
Form 5472: What It Is, Who Must File And When It's Required
Form 5472 is not a tax return; it's an information return. Form 5472 is here and Instructions to Form 5472 here.
The form is designed to help the IRS monitor certain types of transactions between U.S. businesses and their foreign owners or affiliates. Information provided on the form helps the IRS identify potential audit issues and is the place the IRS starts when auditing foreign-owned businesses in America.
Information provided on Form 5472 discloses both the nature and amount of foreign and domestic transactions that occur with related parties. It is these types of transactions that have the potential for abuse (for example, in transfer-pricing transactions or when trying to remove taxable earnings and profits of the business in a disguised non-taxable form). Form 5472 is also used to gather information to share with foreign governments under international tax treaties and exchange agreements as the push toward global transparency and cross-border reporting continues.
Form 5472 must be filed annually by a 'reporting corporation' when there is a 'reportable transaction' with a 'related party' occurring in that particular tax year. A reporting corporation is (i) a U.S. corporation that is at least 25% owned by non-U.S. shareholders or (ii) a foreign corporation that is engaged in a U.S. trade or business.
Several important points should be noted:
Form 5472 Requires A 'Reportable Transaction' With A 'Related Party'
A reporting corporation must examine transactions occurring in each tax year to determine if it has engaged in a 'reportable transaction' with a 'related party.' If it has, Form 5472 must be attached to the reporting corporation's income tax return by the due date (including extensions) of the return.
A separate Form 5472 must be filed for each related party (whether foreign or domestic) with which the reporting corporation has had a reportable transaction.
What Is A 'Reportable Transaction'?
By broad overview, a 'reportable transaction' is any exchange of money or property such as a payment for sales, rents, royalties, interest. Related-party loans are reportable transactions, but they are often overlooked. 'Reportable transactions' are listed predominantly in Part IV of the Form 5472 and are detailed in the instructions.
Who is a 'Related Party'?
The definition of a related party is very broad and involves different sections of the U.S. Internal Revenue Code, including rules for constructive ownership. Generally, a related party includes any direct or indirect 25% foreign shareholder of the reporting corporation. It also includes any person related to the reporting corporation or to one of the 25% shareholders. Due to its complexity, professional tax advice should be taken to see if a 'related party' is involved.
25%-Or-Greater Foreign Shareholder
The reporting corporation must file the Form when it has a reportable transaction with direct or indirect non-US shareholders who own 25% or more of its stock by vote or value. This can get confusing since there may be numerous foreign persons owning, in the aggregate, 25% or more of the corporation.
The Form is required only when a single non-US entity or individual owns 25% or more of the corporation. If several foreign shareholders owning a 25%-or-greater interest engage in a reportable transaction with the corporation, then a separate Form 5472 must be filed by the reporting corporation with respect to each of them. This means multiple filings for the same year.
Form 5472 Is Not One To Miss – Penalties Apply
Failure to file a Form 5472 or maintain the required supporting records could mean a $25,000 civil penalty for each failure. If several filings were required for the same year but were missed, the penalties can easily multiply. There are possible ways to rectify late filings and, depending on the facts, penalties might be averted.
Form 5472 is more than just another item of paperwork. It is part of a global shift toward greater transparency and cross-border reporting with IRS making it harder and harder to escape penalties for international tax noncompliance. When a business structure in the U.S. includes any foreign owners or involves foreign operations, don't fall prey to the notion that it is under the radar.
When in doubt, do the smart thing and get proper tax advice. The penalties for getting it wrong are steep, while the cost of getting it right is minimal in comparison.
Stay on top of tax matters around the globe.
Reach me at vljeker@us-taxes.org
Visit my U.S. tax blog www.us-tax.org
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