As business becomes more global, tax authorities worldwide are strengthening compliance regulations, raising fines and demanding more information from corporations that do business internationally. One example of the increased emphasis on enforcement is an information-only form many multinationals must send the IRS along with their tax returns. Those who fail to complete and submit the form on time now face stiff penalties.
Filing Form 5472
U.S. companies that are 25 percent or more foreign-owned, foreign companies that are engaged in business with the U.S., and single-member disregarded entities owned by foreign companies all must file informational Form 5472 along with their U.S. corporate tax return if they engage in a reportable transaction during the tax period. Reportable transactions include: sales; rental income; loans to or from a related party; interest received or paid; royalties received or paid; consideration for services paid or received that involve the U.S. company and the foreign owner or an entity related to the foreign owner. Companies must file a separate Form 5472 for each party with whom they have a reportable transaction.
The form itself is nothing new, but reporting requirements were expanded under the Tax Cuts and Jobs Act of 2017, and the penalties were increased. The penalty for failure to file or for filing late increased from $10,000 to $25,000 per form, plus an additional $25,000 for each 30-day period after the date the initial violation notice was mailed, for up to 90 days total. Since a Form 5472 is required for each reportable-transaction partner, some companies have been fined multiple times for not including 5472 forms associated with a single return.
If you fail to submit a Form 5472 on time, the IRS will certainly find out about it. Starting in 2013, the agency began issuing automated "robofines" to companies that don't file the form with their tax returns, rather than holding up the process with manual reviews. That means companies that fail to include the form are guaranteed to face penalties.
As a result of these changes, more companies face fines. Many firms are struggling to meet the growing and changing demands of international information requests, and errors and omissions are becoming more commonplace. New non-U.S. companies whose managers are unfamiliar with U.S. tax laws often run into difficulties with Form 5472.
Companies that are penalized can request an abatement if they show they were unable to file for a "valid reason," such as a natural disaster or medical emergency. Alternatively, they may endeavor to show that they have a "reasonable cause" for not filing or for filing late.
Companies hit with a penalty for the first time have yet another option: a first-time abatement waiver. The company must file a tax return and pay any taxes owed before requesting a waiver, and must have a history of paying its taxes on time.
If the tax filing and good payment history requirements are met, a first-time abatement request has a good chance of succeeding. Some companies also include a "reasonable cause" defense with their first-time abatement waivers, but whether this tactic is helpful is unknown, since the IRS does not state the reasons for penalty removal.
Abatement for a reasonable cause
Companies can request penalty abatement if they show they exhibited "ordinary business care and prudence" but were nevertheless unable to comply with the law. In making a determination, the IRS will consider the explanation for the failure to file (or file on time) and any circumstances beyond the company's control. It will also examine tax payment and penalty history and the company's reaction to the notice of the violation — did the company take steps to comply before or after the notice was received? If so, how long did it take to respond?
There are in short no bright-line rules indicating what constitutes acceptable reasonable-cause explanations. For example, a claim of not having access to records or information is not considered a reasonable cause. Neither, in many cases, is purported ignorance of the law. The IRS will consider a taxpayer's education, whether the taxpayer has been subject to the tax before, whether there were recent changes to the law or tax form, and the complexity of the compliance issue. If the form has been filed in previous years, it is not possible to argue ignorance of the reporting rules.
The best way to avoid trouble is to file your tax return on time and err on the side of including a Form 5472 for any transaction that looks like it may merit one. Companies can find IRS information about Form 5472 and instructions for completing it online.
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