Can Late-Filed Form 5472 Penalties be Abated or Avoided?

Late-Filed Form 5472 Penalties

While there are many types of international information reporting forms that US persons with foreign accounts, assets, investments, and income may have to file – – such as the FBAR or Form 8938 — there are also forms required by non-US persons who have ownership of a US Entity and/or operate in the United States. The most common of these types of forms is Form 5472 which is used by non-US persons who have certain ownership or interest in a US entity or disregarded entity — and conduct various reportable transactions in the United States. A few years back, the Internal Revenue Service increased the penalties of Form 5472 from $10,000 all the way up to $25,000. This reflects the fact that Form 5472 enforcement is on the rise — which is primarily because the US government is concerned that foreign persons are escaping US tax and reporting by creating disregarded entities in the United States. If you have been hit with a Form 5472 Penalty (usually by way of a CP-15 Notice) — or are being proactive in order to comply with 6038A ad 6038C to avoid penalties — here are some tips.

Reasonable Cause for Form 5472

In general, when a taxpayer is able to show that they acted with reasonable cause and not willful neglect in failing to meet one of the reporting requirements, they can avoid penalties — and if penalties were already issued, to have those penalties abated. There is no specific Reasonable Cause Form that the taxpayers use in order to submit a reasonable cause submission to the IRS.  Rather, the taxpayer provides a reasonable cost statement and supporting package showing that based on the totality of the circumstance, the taxpayer should no be penalized.

Form 5472 Delinquency Procedures

When Taxpayers have no unreported income and the only missed requirement was an international reporting form, it used to be the penalties that would almost always be avoided under the Delinquent International Information Return Submission Procedures (DIIRSP). Fast-forward to November 2020 and the Internal Revenue Service modified this program so that a penalty waiver is no longer guaranteed. Nevertheless, when taxpayers have no missed unreported income and the only thing they are missing is the form, oftentimes they can avoid penalties – whether at the outset or later when disputing the penalty.

Streamlined Procedures or Voluntary Disclosure

In general, the Streamlined Filing Compliance Procedures and traditional Voluntary Disclosure Program are for US persons who typically have a US tax return filing requirement. Still, depending on the specific facts and circumstances a foreign taxpayer may still qualify for either the Streamlined Procedures or Voluntary Disclosure – – the latter program is for taxpayers who are either willful or cannot certify under penalty of perjury that they are non-wilful.

26 USC 6751 (b) 

Form 5472 is referred to as an “assessable penalty” — which means the penalty is assessed before the taxpayer has an opportunity to dispute the penalty being issued. There are certain requirements that the IRS must meet in order to issue this type of penalty and sometimes a taxpayer may be able to fight the penalty if they can show that the IRS did not follow proper procedures, noting there are certain exceptions and exclusions to the procedure requirements as well.

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