Form 5472

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is the disclosure that makes inbound related-party transactions visible to the IRS. It reports what a US entity bought from, sold to, lent to, borrowed from, licensed to, or otherwise transacted with its foreign related parties during the year.

Three filer populations exist. A US corporation with at least one direct or indirect 25% foreign shareholder at any time during the year, where there was a reportable transaction. A foreign corporation engaged in a US trade or business with reportable transactions. And, since regulations effective for tax years beginning in 2017, a domestic disregarded entity that is wholly owned by a foreign person, which is treated as a corporation solely for this purpose.

That third category is the one that catches people, and it catches them badly. A foreign individual who forms a single-member US LLC that never elected corporate treatment has an entity with no US income tax return obligation of its own. It must nonetheless file a pro forma Form 1120 with Form 5472 attached, by the Form 1120 due date, purely as the carrier for the information return. It must also obtain an EIN, and it must maintain records adequate to establish the correctness of the return. Owners routinely learn this after several years of not filing, at $25,000 per year.

A reportable transaction is broadly defined and includes sales and purchases of stock in trade and other tangible property, rents and royalties, sales, purchases or use of intangible property, consideration for technical, managerial, engineering, construction, scientific or similar services, commissions, loans and interest, premiums for insurance or reinsurance, and amounts loaned or borrowed. For disregarded entity filers, the definition reaches further, covering contributions to and distributions from the entity, which is why a capital contribution alone can create a filing obligation.

The penalty under Section 6038A is $25,000 per failure, per reporting corporation, per year, applied to a failure to file, a substantially incomplete filing, or a failure to maintain the required records. Continuation penalties of $25,000 accrue for each 30-day period after a 90-day notice period expires. Section 6038A also requires the reporting corporation to authorize the foreign related party to act as its agent for summons purposes, and a failure there triggers its own consequences including a determination of the correct amounts by the IRS on the basis of its own information.

Because the form is the primary source of inbound related-party data, it also functions as a selection tool. A Form 5472 showing large intercompany service charges or royalties with no supporting transfer pricing documentation is a reasonable place for an examiner to start, which is the operational link between this filing and the Section 482 exposure it discloses.

Related terms: Transfer Pricing, Section 482, Form 5471, Form 1120

Go deeper: Transfer Pricing Documentation: A Practitioner's Guide to Scoping and Defending It

Populating a 5472 means enumerating every intercompany flow by counterparty and category, which no operating ledger produces on its own. Adopt's agents extract and classify those transactions from the underlying records. Sign up free.