CPAs without international tax experience too often overlook IRS Form 5472, leading directly to problems for companies with 25% or more foreign ownership. Foreign ownership can mean either a foreign national or a foreign business entity, like a foreign corporation, owning an interest in a US corporation directly or indirectly (through other entities). LSL CPAS has seen too many local companies in Orange County in general and high-tech start-ups in Irvine in particular hurt by such careless accounting mistakes.
Since the ownership stake can be as small as 25%, the foreign owners are often silent partners without direct participation in the business, and their ownership gets overlooked. The international tax consultants at LSL CPAs have seen this happen with a few high-tech start-ups in Irvine and with established companies across Orange County.
Also, since indirect ownership also counts, tiered entities have to have information regarding the structure of the entire group to calculate the indirect ownership percentage. Attribution rules can get tricky, and the indirect ownership percentage sometimes gets either overlooked or miscalculated.
If foreign ownership exists and meets the percentage ownership requirement, it does not matter what role foreign owners play in the business. IRS Form 5472 must be filed regardless of when the reportable transactions occur. LSL CPAs ensure our clients know this fact and file IRS Form 5472 on time.
It is important to realize that the information required to be disclosed is not limited to the transactions between the reporting corporation and its direct or indirect 25% foreign shareholder. Transactions with foreign entities related to the foreign 25% shareholder are also subject to reporting. Form 5472 is filed for each foreign or domestic related party with which the reporting corporation engaged in reportable transactions during the year.
The practical importance of Form 5472 is that the IRS often uses this form as a starting point for conducting a transfer pricing audit. Still, it is essential to remember that the disclosed information can also be used to ensure that the importers of tangible goods from foreign-related entities are reporting the same values of goods for customs duties purposes as for transfer pricing purposes. The belief of LSL CPAs is not to risk the displeasure of either the Treasury Department or the IRS. By filing such international IRS tax forms on time and with precision, we keep the IRS focus away from our clients.
Such IRS focus is essential to avoid because the penalties for failure to file IRS Form 5472 are huge. A penalty of $10,000 will be assessed on any reporting corporation that fails to file IRS Form 5472 when due and in the manner prescribed. In addition, the penalty is not just one $10,000 fine, but $10,000 for every year the form was not filed. Filing a substantially incomplete Form 5472 (for example, not reporting transactions with related entities) constitutes a failure to file Form 5472. If you did not know you had to file IRS Form 5472 because your CPA did not understand the international tax laws, the IRS will not care that the mistake was not yours. You will be penalized if the IRS finds out.
Although this content contains accurate information, it is inherently limited because of the article’s length. As a result, it presents only a partial view of the subject matter. To learn if you need help filing IRS Form 5472 and to access the guidance of a quality international tax consultant, please call LSL CPAs international tax expert Yana Weaver at 714.569.1000.
