U.S. Investment: IRS increased enforcement, application, and penalty on common form
The importance of proper tax compliance when investing in the U.S. is very well known. However, as with much of U.S. international tax, the informational reporting is often overlooked but is as important, if not more, than the actual reporting and paying of the income tax. Recently, we have seen increase scrutiny on one of these informational forms, which comes at a time when the IRS has recently increased the application of the form as well as the penalty amount.
Form 5472 is required for U.S. corporations that are owned at least 25% by a foreigner and have certain transactions with that foreign owner. There is an enumerated list of transactions that qualify for reporting, but a few of these are written very broad to the point that it can be argued any financial transaction is required to be reported. In fact, this is a very often debated topic among tax professionals, especially for investors holding vacation property that has financial transactions but is not a “business.” Nevertheless, this is not the increased application. Beginning in 2017, the form must be considered for U.S. disregarded entities. Most commonly, these entities are LLCs with a single owner setup to hold U.S. property. This can be confusing because not only are these LLCs disregarded for tax purposes, they are not even U.S. corporations, which is the general application of the form. If that was not complex enough, the Form 5472 is not even filed by the owner but instead must be filed by the LLC and attached to an incomplete and modified Form 1120 (the corporate U.S. tax form).
Now that the rules are overly broad and confusing, the IRS also increased the penalty on this form from $10,000/year to $25,000/year. We have been contacted by many taxpayers that have received these penalties and abatement has been very difficult. For example, technically the first time exception does not apply to a non-filed form, which means it can’t be used for a late Form 5472. In general, the IRS is making it clear that it considers it very important that this former is timely and properly filed.
For years we have discussed the importance of proper income tax planning when investing in the U.S. This illustrates it is not only important for potential income tax mitigation but also for avoiding costly penalties for missing one short form.