A guide to Form 5472 penalty structure, how penalties accumulate, and available relief options for foreign-owned U.S. businesses
Quick Facts:
- $25,000 Initial penalty per form
- No maximum Penalties can accumulate indefinitely
- 90 days Response period after IRS notice
- Per form Separate penalty for each related party
Table of Contents
The Stakes: Why Form 5472 Penalties Are Severe
Form 5472 penalties are among the most severe in the tax code for information return non-compliance. At $25,000 per form, even a small foreign-owned business can face devastating financial consequences for failing to file or filing incomplete returns.
Understanding the penalty structure helps emphasize the importance of compliance. For a comprehensive overview of Form 5472 requirements, see our Complete Guide to Form 5472 for Foreign-Owned U.S. Businesses.
Real Risk Example: A foreign investor with a single-member LLC who has been unaware of the filing requirement since the 2017 expansion could face $150,000+ in potential penalties for 6 years of non-compliance—even if the LLC had minimal activity.
Note on OBBBA Changes (2026+): While the One Big Beautiful Bill Act introduces new requirements (1% remittance tax, FTIN requirements, enhanced reporting), Form 5472 penalty amounts remain unchanged at $25,000 per form with no maximum. The increased reporting complexity makes compliance assistance more valuable than ever.
Understanding the Penalty Structure
IRC Section 6038A Penalties
The penalty for failure to file Form 5472, or filing a substantially incomplete return, is established under IRC Section 6038A(d):
Initial Penalty:
- $25,000 per form, per tax year
- Applies to each separate Form 5472 required
- Multiple related parties = multiple forms = multiplied penalties
Continuation Penalties:
- If information is not furnished within 90 days of IRS notice
- Additional $25,000 for each 30-day period (or fraction thereof)
- No statutory maximum—penalties can continue indefinitely
How Penalties Multiply
The per-form penalty structure means exposure grows quickly:
| Scenario | Calculation | Potential Penalty |
|---|---|---|
| 1 form, 1 year | 1 × $25,000 | $25,000 |
| 1 form, 3 years | 3 × $25,000 | $75,000 |
| 3 forms, 1 year | 3 × $25,000 | $75,000 |
| 3 forms, 3 years | 9 × $25,000 | $225,000 |
| 5 forms, 5 years | 25 × $25,000 | $625,000 |
What Triggers Penalties
Failure to File:
- Not submitting Form 5472 when required
- Missing filing deadline without valid extension
- Not filing for foreign-owned disregarded entities
Substantially Incomplete Filing:
- Missing required information
- Incomplete transaction reporting
- Failure to identify all related parties
- Incorrect or missing EIN
Failure to Maintain Records:
- Not keeping required documentation
- Records not available within 60 days of IRS request
- Records maintained outside U.S. without proper authorization
Penalty Accumulation Timeline
How Continuation Penalties Work
After the IRS determines a Form 5472 failure, they issue a notice demanding compliance. The timeline then proceeds:
| Phase | Time Period | Penalty |
|---|---|---|
| Initial assessment | Failure detected | $25,000 |
| Notice issued | Day 0 | No additional yet |
| Response period | Days 1-90 | Grace period to comply |
| First continuation | Day 91+ | +$25,000 |
| Second continuation | Day 121+ | +$25,000 |
| Third continuation | Day 151+ | +$25,000 |
| Ongoing | Each 30 days | +$25,000 |
No Maximum Limit
Unlike some other information return penalties, Form 5472 continuation penalties have no statutory maximum. Penalties continue to accumulate at $25,000 per 30-day period until the required information is provided.
Special Situations: Multiple Forms
Multiple Related Parties
Each related party requires a separate Form 5472. This means penalties multiply:
Example: A U.S. subsidiary with transactions involving:
- Foreign parent company
- Foreign sister company
- Foreign service provider owned by same parent
Result: Three separate Form 5472s required, with $75,000 initial penalty exposure for a single year.
Multiple Years of Non-Compliance
Foreign investors who discovered the requirement late face compounded exposure:
Example: LLC formed in 2018, no Form 5472 filed through 2023
- 2018: $25,000
- 2019: $25,000
- 2020: $25,000
- 2021: $25,000
- 2022: $25,000
- 2023: $25,000
- Total: $150,000 initial penalty exposure
When Penalties May Be Reduced or Waived
Reasonable Cause Defense
The IRS may abate Form 5472 penalties if the taxpayer can demonstrate reasonable cause. To establish reasonable cause, you must show:
- You exercised ordinary business care and prudence
- You were unable to comply despite reasonable efforts
- Your failure was not due to willful neglect
Factors the IRS Considers
In Your Favor:
- First-time violation with clean compliance history
- Reliance on professional advice (even if incorrect)
- Unusual circumstances beyond your control
- Prompt filing once obligation was discovered
- Good faith effort to comply
Against You:
- Pattern of non-compliance
- Failure to disclose foreign ownership to tax preparer
- Ignoring professional advice to file
- Tax avoidance motive
- Prior history of international reporting failures
Writing a Reasonable Cause Statement
A strong reasonable cause statement should include:
- Identification: Taxpayer name, EIN, tax years involved
- Facts: Complete description of circumstances leading to failure
- Ordinary Business Care: Steps you took to comply with tax obligations
- Cause of Failure: Specific reason(s) why filing didn’t occur
- Corrective Action: What you’ve done to remedy the situation
- Non-Willfulness: Statement that failure was not intentional
Relief Programs Available
1. Delinquent International Information Return Submission Procedures
Eligibility:
- Not currently under IRS civil examination
- Not under criminal investigation
- Not previously contacted by IRS about these returns
Requirements:
- File all delinquent Form 5472s
- Attach reasonable cause statement to each form
- File with current year return or separately
- Use appropriate filing address
Process:
- Prepare all delinquent returns completely
- Write detailed reasonable cause explanation
- Submit before any IRS contact
- Document your compliance efforts
2. Streamlined Filing Compliance Procedures
For Non-Willful Taxpayers:
- File 3 years of amended or delinquent returns
- File 6 years of delinquent FBARs if applicable
- Submit certification of non-willfulness
- Pay any tax and interest due
Domestic vs. Foreign Streamlined:
- Domestic (U.S. resident): 5% miscellaneous offshore penalty
- Foreign (non-U.S. resident): No miscellaneous penalty
3. First-Time Abatement
Limited Applicability:
- Generally tied to underlying return penalties
- Requires clean compliance history (3 years)
- May apply if Form 1120 qualifies
- Not specifically designed for Form 5472
4. Requesting Abatement After Assessment
If penalties have already been assessed:
- File Form 843 (Claim for Refund and Request for Abatement)
- Attach comprehensive reasonable cause statement
- Provide all supporting documentation
- Request abatement of assessed penalty
Practical Guidance for Common Scenarios
Scenario 1: Recently Discovered Obligation
Situation: Foreign investor formed LLC in 2020, just learned about Form 5472 requirement.
Approach:
- Calculate total forms and years owed
- Prepare all delinquent returns completely
- Draft reasonable cause statement explaining:
- When you learned of requirement
- Why you were unaware
- Steps taken upon discovery
- File under delinquent procedures
- Establish system for future compliance
Scenario 2: Prior Tax Preparer Error
Situation: Previous CPA never mentioned Form 5472, client disclosed foreign ownership.
Approach:
- Document communications with prior preparer
- Show that foreign ownership was disclosed
- Establish reliance on professional advice
- Prepare all delinquent returns
- File with reasonable cause citing professional reliance
Scenario 3: Thought LLC Was Too Small
Situation: Foreign owner believed small LLC with minimal activity was exempt.
Approach:
- Explain the misunderstanding
- Document the limited activity
- Show no tax avoidance motive
- Demonstrate good faith
- File with reasonable cause statement
Scenario 4: Zero Activity LLC
Situation: Foreign-owned LLC was formed but never operated.
Approach:
- Explain that formation itself creates reportable transactions
- Document belief that no filing was required
- Show no income or operations
- File delinquent returns showing formation transactions only
- Request penalty abatement based on circumstances
What to Do If You Receive IRS Notice
Step 1: Don’t Ignore It
IRS notices about Form 5472 have deadlines. Ignoring them leads to continuation penalties.
Step 2: Assess the Situation
- Review the notice carefully
- Determine what year(s) and forms are at issue
- Calculate potential penalty exposure
- Gather relevant records
Step 3: Respond Within the Timeframe
- 90-day response period is critical
- Continuation penalties start after 90 days
- Request extension if needed
Step 4: Consider Professional Help
- International tax penalties are complex
- Professional representation may help
- Cost of assistance vs. penalty exposure
Step 5: Document Everything
- Keep copies of all correspondence
- Document your response efforts
- Maintain timeline of events
Prevention: Avoiding Future Penalties
Annual Compliance Checklist
- Verify foreign ownership status
- Identify all related parties
- Track all related party transactions
- Prepare Form 5472 for each related party
- File by deadline or obtain extension
- Maintain 7-year record retention
Working with Professionals
- Engage CPA familiar with Form 5472
- Disclose all foreign ownership
- Provide complete related party information
- Review forms before filing
- Calendar deadlines
System Implementation
- Track related party transactions throughout year
- Flag intercompany payments in accounting system
- Maintain current ownership structure documentation
- Calendar Form 5472 deadlines
- Document compliance procedures
Frequently Asked Questions
What is the penalty for not filing Form 5472?
The initial penalty is $25,000 per form, per year. Additional penalties of $25,000 per 30-day period apply after a 90-day IRS notice period, with no maximum limit.
Can Form 5472 penalties be waived?
Yes. The IRS may waive penalties if you demonstrate reasonable cause for the failure. Filing through delinquent submission procedures before IRS contact improves the likelihood of penalty relief.
What qualifies as reasonable cause?
Reasonable cause means you exercised ordinary business care and prudence but were still unable to comply. Common factors include reliance on professional advice, unusual circumstances, and prompt correction upon discovering the obligation.
How do I file if I’ve missed multiple years?
Use the Delinquent International Information Return Submission Procedures. Prepare all delinquent forms, attach reasonable cause statements, and file before IRS contact if possible.
Do penalties apply if my LLC had no income?
Yes. The filing requirement exists regardless of income or activity. Formation transactions alone require reporting, and penalties apply for non-compliance.
What if I can’t afford to pay the penalty?
Request penalty abatement through reasonable cause. If penalties are upheld, you may explore installment agreements or offer in compromise, though these are difficult for penalties.
Should I hire a professional to help with penalties?
Given the $25,000+ exposure, professional assistance is often cost-effective. CPAs and tax attorneys experienced with international information returns can help with reasonable cause arguments and IRS correspondence.
How long does the IRS have to assess Form 5472 penalties?
Unlike income tax returns, there is no standard statute of limitations for Form 5472 penalties when no return was filed. The IRS can assess penalties at any time until compliant returns are filed.
Professional Penalty Relief Services
SDO CPA provides comprehensive Form 5472 penalty relief services:
- Penalty exposure assessment
- Reasonable cause statement preparation
- Delinquent return preparation
- Streamlined filing assistance
- IRS notice response
- Ongoing compliance monitoring
Form 5472 penalties can be significant. Professional guidance may help. Contact SDO CPA for a consultation to assess your situation and determine the best path forward.
Related Articles
- Complete Guide to Form 5472 for Foreign-Owned U.S. Businesses
- Form 5472 for Foreign-Owned LLCs: Complete Filing Guide
- Form 5472 Reportable Transactions: What Must Be Reported
- Complete Guide to Form 5471 for U.S. Shareholders of Foreign Corporations
This guide is for informational purposes only and does not constitute tax or legal advice. Penalty situations are fact-specific and require professional evaluation. Consult a qualified tax professional before taking action on Form 5472 compliance issues.