The IRS Office of Associate Chief Counsel (International) recently issued Chief Counsel Advice (CCA) 202617012 addressing when small foreign-owned corporations can qualify for penalty relief for failure to file Form 5472.
IRC § 6038A and 6038C require Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) as an IRS information return. Its purpose is to report to the IRS certain transactions between U.S. entities and their foreign owners or related parties for use by the IRS in monitoring for tax avoidance and enforcing transfer pricing rules.
Failure to file (e.g., late filing a tax return with a Form 5472) generally triggers a $25,000 automatic penalty per form. The penalty amount remains the same regardless of transaction value or taxpayer size. That is why the small corporation penalty relief provisions (addressed by the CCA) are so important. For more information on the requirements for filing Form 5472 and the increase in the penalty amount, see our previous articles here and here.
The New Guidance: Chief Counsel Advice (CCA) 202617012
When a taxpayer fails to file Form 5472, the Internal Revenue Code (“IRC”) provides a potential avenue for penalty relief under the “reasonable cause” exception. Under this exception, taxpayers may avoid penalties if they can demonstrate that the failure resulted from reasonable cause and good faith rather than willful neglect.
For smaller corporations, Treas. Reg. § 1.6038A-4(b)(2)(ii) includes a special rule referred to as the Small Corporation Provision (SCP). The rule directs the IRS to apply the reasonable cause exception liberally in certain circumstances. Until the issuance of CCA 202617012, considerable ambiguity existed as to when and how the SCP applied. This CCA resolves some of the ambiguities by providing guidance to IRS personnel on how to evaluate penalty relief requests under the SCP. Specifically, it addresses two main aspects of evaluating penalty relief:
- The four prerequisites and
- Definition of “liberal” application.
The Four Prerequisites to Qualify for the SCP
CCA 202617012 establishes that a corporation must satisfy all four of the following prerequisites before the IRS will apply the liberal reasonable cause standard:
PREREQUISITE |
KEY CONSIDERATIONS |
|
Small Corporation Size |
The SCP applies to overall (i.e., “global”) gross receipts—not just U.S. receipts. A foreign company with significant overseas revenue may not qualify even if its U.S. business is modest. |
|
Lack of Knowledge |
Prior filing history of the corporation or that of a related entity or owner—will be considered in this determination. |
| Limited U.S. Presence The corporation must have had a limited footprint in the United States, consistent with a lack of awareness of U.S. information reporting rules. |
Factors to be considered include: the experience and location of the taxpayer’s corporate officers and managers, the number and size of transactions with customers located in the U.S., and the degree to which the taxpayer’s operations involved interactions with individuals, businesses, and federal, state, and local governments in the U.S. |
| Full and Prompt Compliance Upon IRS contact, the corporation must have responded promptly, completely, and consistently. |
Delay, incomplete responses, or inconsistencies in information provided will weigh against the taxpayer. |
Failure to satisfy even one prerequisite disqualifies the corporation from the SCP. However, the IRS may still evaluate the general “non-liberal” reasonable cause standard.
What Does “Liberal” Application Mean?
CCA 202617012 clarifies that a “liberal” application of the reasonable cause exception affects the level of scrutiny applied in considering if relief should be granted. While relief under the new guidance is not automatic, taxpayers should have an easier time obtaining relief if they satisfy all requirements.
In practical terms, a Small Corporation may qualify for reasonable cause relief by providing a sworn statement with a credible, factually supported explanation for its failure to file and cooperating promptly with authorities. In such cases, the IRS may grant relief without further inquiry or investigation.
Furthermore, even when relief is granted under the SCP, the underlying obligation to file Form 5472 and maintain records is not eliminated. It is the penalty that is waived, not the compliance requirement itself.
Navigating Form 5472 Compliance
WilkinGuttenplan’s International Tax practice continues to monitor developments related to Form 5472 compliance and other cross-border reporting obligations. These rules may affect foreign-owned businesses and multinational entities in different ways depending on their structure and reporting requirements.
For questions regarding Form 5472 obligations or the implications of CCA 202617012, please contact your WG advisor. Call (732) 846-3000 or submit an inquiry below.
Questions? Ask a WG Advisor
