IRS Form 5472 with Examples: Foreign-Owned U.S. Entities

IRS Form 5472 with Examples: Foreign-Owned U.S. Entity

IRS Form 5472 with Examples

In most circumstances, it is a U.S. Person (U.S. Citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test) who is required to file the various international information reporting forms to disclose their foreign accounts, assets, entities, trusts, etc. to the IRS. Some of the more common IRS foreign tax forms include Form 8938, Form 3520, Form 3520-A, and FinCEN Form 114 (FBAR). But, in addition to requiring U.S. persons with foreign accounts and assets to report their information to the U.S. government, the IRS also requires certain foreign-owned U.S. corporations (and Disregarded Entities ‘DE’) to report their ownership and transactions on Form 5472 when the threshold requirements are met. As a result, even a foreigner who has no U.S. person status may still be required to report their ownership of a U.S. entity or DE to the IRS. The purpose of this rule is to ensure that foreigners who may have Effectively Connected Income (ECI) with reportable transactions properly pay U.S. taxes on their income. Let’s work through some of the basics of Form 5472 with some examples.

Who is a Foreign Person?

For purposes of this Form 5472 summary, we are focusing on individuals (the term ‘person’ in the context of entity ownership includes more than individuals). In general, a foreign person individual is an individual who is not considered a U.S. person for tax purposes.

• • • Example 1: Michelle is a foreign citizen who wants to invest in the United States. She has no U.S. person status, and invests into a U.S. corporation, becoming a 30% holder of the company. She may have a Form 5472 filing requirement.

    • Example 2: Brenda is a U.S. citizen who lives and works overseas. She wants to invest in a U.S. company and now has 40% interest in the U.S. corporation. Even though Brenda lives and works overseas she is not a foreign person for tax purposes and therefore her 40% interest would not be considered foreign owned.

25% Foreign-Owned U.S. Corporation or Disregarded Entity

In most scenarios, a Form 5472 reporting requirement will arise in a situation in which foreign persons have 25% or more ownership in a U.S. corporation or even a disregarded entity, and engages in certain reportable transactions. The IRS provides different definitions of what is considered a foreign shareholder — including distinctions between a direct shareholder, related party, and ultimate indirect shareholder. At the end of the day, if a person is deemed to have 25% ownership of a U.S.-owned corporation, they may be required to file Form 5472.

• • • Example 1: Peter and Scott are non-resident aliens who want to conduct business in the United States. They each invest in a U.S. corporation resulting in each of them having 25% ownership. 

    • Example 2: Melinda wants to operate in the United States as a non-resident alien but she is the only owner of the entity so she decides to form a SMLLC. Even though from a technical standpoint an SMLLC is disregarded for U.S. tax purposes, for Form 5472 purposes she may still be required to report to the IRS because disregarded entities also have to report on Form 5472.

What are Reportable Transactions?

One of the main requirements — besides being a foreign person – that mandates the filing of Form 5472 is that the entity or DE engaged in certain reportable transactions. Several different types of reportable transactions may require the filing of Form 5472.  

Examples of common types of reportable transactions include:

• • • Sales of stock in trade (inventory)

    • Cost sharing transaction payments

    • Rents received (for other than intangible property rights)

    • Commissions received

What are the Exceptions to Filing?

Most foreign nationals who are not considered U.S. persons for tax purposes should try to avoid reporting on Form 5472 when they can. This is because most foreigners will have no other interaction with the U.S. tax system aside from having 25% or more ownership in the U.S. entity or disregarded entity. It may be very overwhelming and cost-intensive to have an annual Form 5472 filing requirement — especially if the U.S. entity is not resulting in any net effective income benefit to the foreign filer.

• • • Example 1: Jennifer is a 30% owner in the U.S. S-corporation that is not conducting any business and not engaged in any transactions in the current year. Since there are no reportable transactions, Jennifer may be able to avoid having to file Form 5472.

    • Example 2: Michael is a 25% owner of a U.S. corporation. David is a 60% owner of a foreign corporation who controls a foreign corporation and is a related party corporation to the U.S. company. David files form 5471 along with schedule M to report all reportable transactions.  Michael may be able to avoid filing Form 5472.

*If a treaty election applies and Form 8833 is timely filed, a filer may be able to avoid filing Form 5472.

How to File an Extension

It is very important to note that unlike other international reporting forms such as Form 8938 and Form 3520 that automatically go on extension when the Taxpayer files an extension to extend their underlying tax return, Form 5472 requires additional filing. To apply for an extension for Form 5472, the Taxpayer must file a Form 7004 extension form. This is similar to when Taxpayers have to file Form 7004 to extend the time to report a foreign trust on Form 3520-A.

Form 5472 Penalties

Form 5472 penalties are much harsher than other international reporting forms. Previously the Form 5472 fine was the standard $10,000 penalty similar to the penalty for Form 5471 (which is used by U.S. persons to report foreign corporations). The standard Form 5472 penalty was subsequently increased to $25,000 instead of $10,000 — and the failure to file after receiving notice from the IRS of non-filing may result in subsequent $25,000 penalties.

In addition, the U.S. government can pursue criminal penalties for failing to file Form 5472 but this is not common and typically arises in situations in which there are other criminal violations such as money laundering, tax fraud, tax evasion, etc.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.