As explained by the Internal Revenue Service (IRS), form 5472 should be used to provide the information required under Section 6038A and Section 6038C when reportable transactions occur during the relevant tax year of a reporting corporation with a foreign related party or a foreign corporation engaged in a US Trade or Business.
Needless to say, the official IRS explanation of this form is not a very clear one.
IRS form 5472 is challenging to complete and file and, if it is not done correctly, it could lead to serious problems. In this article, I explain what IRS form 5472 is, why you need to file it, and how it should be completed.
What is IRS Form 5472?
Foreign taxpayers and those involved in international business or global trade often ask: What is form 5472?
The most straightforward answer is that IRS form 5472 is fundamentally designed to prevent tax evasion. The U.S. government is concerned that companies with substantial foreign ownership could potentially evade American taxes through disguising transactions.IRS form 5472 is used by the federal government to ensure that companies with substantial foreign ownership accurately report comprehensive financial information.
IRS Form 5472: Understanding the Requirements
As a starting point, you need to know whether or not you have a duty to submit form 5472 at all.
To do this, you must determine if your company is a ‘reporting corporation’ for the purposes of United States tax law. Reporting corporations are U.S. corporations that are 25% owned by a foreign person or foreign entity or a foreign corporation that is engaged in a trade or business within the United States. For reporting corporations, the form 5472 disclosure requirements are broad.
Transactions that may need to be reported include:
- Sales or purchases of investors;
- Sales or purchases of real property;
- Royalty payments and licensing agreements;
- Commission paid or obtained;
- Borrowing or lending arrangements; and
- Any other consideration offered for goods or services.
More simply, if a transaction with a related foreign entity affects the U.S. tax obligations of the reporting corporation — meaning it resulted in an increase in revenue or an increase in expenses — it is likely that the transaction should be reported using IRS form 5472. With very limited exceptions, the IRS requires the reporting of all related party transactions with international entities.
There are strict penalties for failure to properly file IRS form 5472. In fact, among many other things, the Tax Cuts and Jobs Act of 2017 enacted increased sanctions for violating this tax law. As of December 31st, 2017, the failure to file form 5472 could result in a $25,000 fine. Do not ignore form 5472. If you do not know what to do, get professional help.
Instructions for Completing IRS Form 5472
Given the industry-specific terminology and language the IRS uses in its official documents, completing IRS form 5427 can be a complicated endeavor.
You will find that the IRS 5472 instructions contain eight sections. This includes:
- Part I: Reporting companies must give the IRS sufficient identifying information, including the name, address, and a description of principal business activities.
- Part II: In addition, 25% or more foreign-owned corporations and LLCs must provide basic information identifying the foreign owner(s).
- Part III: This section is for identifying the related party with which the reporting corporation had reportable transactions during the relevant tax period.
- Part IV, Part V, Part VI: These sections are all for the reportable transactions. What specific information should be provided will depend on a number of different factors.
- Part VII: Part VII asks for additional financial information and offers guidance on certain deductions.
- Part VIII: Finally, the last section is for matters of base erosion and related tax issues.
Once again, the process of completing and submitting IRS form 5472 can be confusing and overwhelming. As there are strict penalties for non-compliance, it is crucial that any and all errors are avoided. If you have any questions or concerns regarding your company’s responsibility to submit this form or about how the form should be completed, an international tax attorney will be able to offer actionable guidance.
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