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International Businesses, Tax & Assurance Guidance

Important Filing Requirement for Foreign-Owned U.S. Companies

Posted on February 19, 2020 by

Rob Cheyne

Nina Wang

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The last thing any business wants to receive is an audit notice from the Internal Revenue Service (IRS).  Your first reaction will naturally be panic or fear.  So, what protective measures can a business or business owner put in place?

An easy, but often overlooked tactic is to simply review your tax compliance activity on a regular basis.  This simple step can help alleviate many of these concerns and result in a more favorable outcome should you have an IRS audit.

Don’t Overlook Form 5472

Here, we’ll discuss one of the most commonly filed forms by our inbound clients: Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Tax. As laws continually change, it’s critical for business owners to keep up with the updates to legislation.  This is a high exposure reporting requirement and is usually used by the IRS to understand global transactions and transfer pricing issues between domestic and foreign-related parties.   2017’s tax legislation from the Tax Cuts and Jobs Act (TCJA) increased the noncompliance penalty from $10,000 per form to $25,000 per form.  A simple oversight can be costly.

Form 5472 applies to any U.S. corporation with 25% direct or indirect foreign ownership AND with reportable transactions with a foreign or domestic related party during the tax year.  The form also applies to a foreign corporation engaged in a U.S trade or business, or to businesses including the foreign-owned U.S. disregarded entities, such as domestic single-member limited liability companies.  If you are a foreign-owned US corporation and have transactions with foreign or domestic related parties, this form most likely will be applicable to you.

Reportable transactions include loans, sales of goods and services, commissions, rent, royalties, interest and other amounts paid or received between the related parties.  The reporting requirement of Form 5472 has also been expanded by TCJA to include information reporting related to some newly enacted international tax rules (e.g. disallowed deductions paid in hybrid transactions or with hybrid entities under IRC 267A, foreign-derived intangible income deduction under IRC 250 and information related to Base Erosion and Anti-Abuse Tax under IRC 59A).

Separate 5472 forms are required for each related party with reportable transactions.  This form is included in the taxpayer’s U.S. corporate income tax return.

For taxpayers that might have overlooked this filing requirement previously, the IRS offers Delinquent International Information Return Submission Procedures that can provide relief to taxpayers with reasonable cause for the failure to file.  More details related to this procedure are available on the IRS’ site.

While we’re discussing Form 5472 for inbound clients, there are many other forms that could also apply.  If you are making a decision about your next CPA, or your business has expanded to require a CPA with international experience, Clayton & McKervey can help.

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Nina Wang

Senior Manager, International Tax

As a member of the firm's international group with a focus on China, Nina specializes in international tax planning and compliance.

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