Form 5472 is an Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The purpose of Form 5472 is to provide information when “reportable transactions” occur with a foreign or domestic-related party during the tax year of a “reporting corporation”.
Buried in the The Tax Cut and Jobs Act (TCJA) was an increase in the penalty associated with the international IRS Tax Form 5472 for failure to furnish information or maintain records. The U.S. Congress increased the penalty from $10,000 to $25,000; demostrating a strong focus on foreign persons and their interest in U.S. corporate entities. The increase of the penalty went unnoticed by many; being buried in the 186 pages of the TCJA.
What is a reporting corporation?
- A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE)), or
- A foreign corporation engaged in a trade or business within the United States
What is a disregarded entity?
A DE is an entity that is disregarded as an entity separate from its owner for U.S. income tax purposes. Previously, many foreign investors were able to purchase US Real Estate through single member limited liability companies without having to disclose its actual Ultimate Beneficial Owner (UBO). Nonetheless, as of 1/2017, foreign-owned Disregarded Entities have been treated as domestic corporations for reporting purposes. IRS began treating DEs wholly owned or controlled by a foreign person as domestic corporations for UBO disclosure purposes by requiring:
- Filing of IRS FORM 5472
- Obtaining a federal employment identification number (EIN)
- Keeping accurate permanent books of account or records
What is a reportable transaction?
Instructions for Form 5472 provides definition of a reportable transaction as: “Any type of transaction for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year”, meaning, any cash in and any cash out. All transactions are reportable. IRS does not present a monetary threshold.
IRS FORM 5472 reportable transactions include the following:
- Sales of stock in trade (inventory)
- Sales of tangible property other than stock in trade
- Platform contribution transaction payments received
- Cost-sharing transaction payments received
- Rents received (for other than intangible property rights)
- Royalties received (for other than intangible property rights)
- Sales, leases, licenses, etc., of intangible property rights (for example, patents, trademarks, secret formulas)
- Consideration received for technical, managerial, engineering, construction, scientific, or like services
- Commissions received
- Amounts borrowed
- Interest received
- Premiums received for insurance or reinsurance
- Purchases of stock in trade (inventory)
- Purchases of tangible property other than stock in trade
- Platform contribution transaction payments paid
- Cost-sharing transaction payments paid
- Rents paid (for other than intangible property rights)
- Royalties paid (for other than intangible property rights)
- Purchases, leases, licenses, etc., of intangible property rights (for example, patents, trademarks, secret formulas)
- Consideration paid for technical, managerial, engineering, construction, scientific, or like services
- Commissions paid
- Amounts loaned
- Interest paid
- Premiums paid for insurance or reinsurance
Who is a Foreign Person?
- An individual who is a citizen or resident of a U.S. possession AND who is not otherwise a citizen or resident of the U.S.
- Any partnership, association, company, or corporation that is not created or organized in the U.S.
- Any foreign estate or foreign trust
- Any foreign government or agency that is engaged in the conduct of a commercial activity
Why did the penalty increase to $25,000 from $10,000 on Form 5472?
There seems to be a studied sense that legal entities remain conduits that may be used for disguising involvement with terrorist financing, money laundering, tax evasion, corruption, fraud, and other financial crimes. The U.S. Government and its Agencies want to support law enforcement with tools for investigating and prosecuting these crimes. It signifies that:
- Foreigners who own assets in the U.S. are required to understand Form 5472 and comply with the mandatory record-keeping requirements. If they don’t comply, they will be faced with a potential $25,000 penalty.
- Under certain circumstances, information collected on Foreigners could be shared with the government of their home country.
Don’t be a victim of your own making
IRS has stated that it wants to improve access to tax information that is needed in order to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws.
Foreign Persons that own 25% of U.S. entities need to understand their tax reporting responsibilities and consult a specialized tax advisor.