Form 5472: Are You Making This Expensive Mistake?

Imagine this. You own a UK company that invests in the United States (US). You didn’t know you had to file Form 5472. Everything seems fine until you receive a letter from the IRS. The fine? A whopping $25,000. I’m just missing this one form.

Form 5472 is not something you can afford to ignore. The consequences are severe. And unfortunately, many companies don’t even know they need to file it. This could happen to you. Avoid the headaches by ensuring compliance with US tax laws and filing obligations with the Internal Revenue Service (IRS). Read and learn all about the form 5472 filing requirements.

These forms may be required for Americans moving to the UK or British citizens looking to move to the US and have limited companies that invest abroad.

What Is Form 5472?

This is an IRS form that foreign-owned companies & a foreign person owning these companies must file if they do business in the US. It reports certain transactions between the company and its foreign owners. This is the US government’s way of keeping an eye on money moving in and out of the country. If you miss filing this form, the penalties are very high. The fine for not filing is at least $25,000.

But here’s the kicker. It’s not just foreign companies that must file. Even US companies with foreign owners must submit this form if they meet the criteria. You must understand your obligations if you run a US business with overseas connections.

How Companies Get It Wrong

Many companies believe they don’t need to worry about Form 5472. But they’re wrong. Let’s look at two very simple examples.

Example 1: A UK Company That Invests in the United States

Imagine you run a UK-based company that buys property in the US. You believe you don’t need to file US forms because your company is in the UK. But the IRS doesn’t see it that way. Because your UK company is engaged in business in the US, you must file to report your US activities.

The IRS fines you $25,000 because you didn’t know the requirement. That’s a painful lesson.

Example 2: A US Company with Foreign Owners

Imagine you’re running a US business, but some investors are overseas. You didn’t know you had to file to report the transactions between your US company and the foreign owners. Again, the IRS steps in with a $25,000 penalty.

Not filing doesn’t just hurt small companies. Even large businesses can fall into this trap if they’re not careful.

Why Does the IRS Require this form to be filed?

The IRS uses Form 5472 to monitor international transactions. They want to prevent money from flowing out of the country without tax. This form helps them ensure foreign-owned companies aren’t shifting profits overseas to avoid paying US taxes.

Without the form, the IRS doesn’t know what’s going on with your business’s foreign transactions. This is why they are so strict about filing it. And why are the penalties so high for those who miss it?

How to File Correctly

The good news is that you can avoid the penalties. First, understand whether your business needs to file it. If your company is foreign-owned and doing business in the US, or if your US company has foreign owners, you probably need to file.

The form itself is part of your annual tax return. It requires details of any “reportable transactions” between your company and its foreign owners. These transactions include things like loans, sales, purchases, and the transfer of assets.

Once you’ve identified that you must file, ensure you meet the deadline. The IRS has strict timelines. Missing the deadline, even by a little, can lead to those harsh penalties. If you’re unsure how to file, consulting a tax expert who understands international business is a good idea.

What Happens If You Don’t File?

If you don’t file, the IRS will fine you. And it’s not just a one-time fine. If you fail to submit the form, the fines will increase. The minimum penalty starts at $25,000. But it can quickly escalate if you don’t act.

The worst-case scenario is a long series of penalties that add up over time. Some businesses have faced penalties that exceed the value of the transactions they were supposed to report. The cost can be astronomical.

What Happens If You Don’t File?

If you fail to file, the IRS will penalize you with an initial fine of $25,000. But that’s not the worst of it. If you don’t correct the mistake within 90 days after being notified, the penalty jumps to $50,000. The longer you delay, the more costly it becomes. In some cases, the fines can keep accumulating, leading to severe financial consequences for your business.

What You Should Do Next

If you’re involved in a foreign-owned company or your US company has foreign owners, take action now. Ensure you’re filing correctly and on time. Ignoring this responsibility can lead to serious financial consequences.

If you’re unsure whether to file the form, consult an expert. Don’t assume that just because you’re outside the US or your business is small, you’re safe from IRS penalties.

If your company cannot afford to pay the Form 5472 penalty and you live in another country, there are still some options you can explore. Ignoring the fine is not recommended, as the IRS has methods to pursue unpaid penalties. Here’s what you can do:

1. Negotiate with the IRS (Reasonable Cause Relief)
You may be able to reduce or eliminate the penalty if you can demonstrate reasonable cause for failing to file Form 5472. Reasonable cause could include events beyond your control, like illness, lack of knowledge about the requirement, or unforeseen financial difficulties. You’ll need to provide detailed explanations and supporting documents to the IRS.

2. Request a Payment Plan
Even if you can’t pay the full amount, you might be able to set up a payment plan with the IRS. This allows you to pay the penalty over time in smaller, more manageable amounts. The IRS does charge interest and fees on these payment plans, but they are an option if you’re unable to pay the lump sum.

3. Offer in Compromise (OIC)
An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. The IRS will evaluate your financial situation, income, and ability to pay before accepting an offer. This is typically considered when it’s unlikely you can pay the full penalty, and doing so would create a financial hardship.

4. Consider Closing the Company
If your company is financially struggling and unable to pay its obligations, you might decide to liquidate or close the business. However, this does not automatically eliminate the penalties owed to the IRS. You may still be personally liable for the debts of the company if you’re a responsible party.

5. Avoid Doing Business in the US
If you have no future plans to do business in the US, and the company is closing, you could choose to withdraw from the US market. While this doesn’t erase the fine, the IRS generally does not pursue penalties against individuals or entities outside the US unless they have assets or income in the country.

Frequently Asked Questions

Who needs to file Form 5472?

Foreign-owned companies doing business in the US must file. Additionally, US companies with foreign owners that engage in certain transactions with those owners must also file.

What kind of transactions must be reported?

You must report transactions like sales, purchases, loans, transfers of property, and payments made between the US company and its foreign owners. The IRS wants a complete account of these dealings.

What is the penalty?

The minimum penalty for failing to file is $25,000. This can increase if you continue to miss deadlines or fail to submit the required information.

When do I need to file?

It is usually filed as part of your company’s annual tax return. The deadline coincides with the corporate tax filing deadline, usually mid-April, but could vary depending on extensions.

How can I avoid penalties?

The best way to avoid penalties is by filing the form accurately and on time will keep you compliant with the IRS and protect your business from fines.