IRS Form 5472 — The Importance of Reporting Foreign Ownership of US Companies

From Budweiser to 7-Eleven and American Apparel, many of the names consumers love, trust, and consistently engage with are foreign-owned. In fact, foreign-owned companies employed over 7 million American workers and generated a massive 16% of all business investments in 2019, so it’s safe to say that foreign-owned businesses help drive a significant chunk of the American economy.

With Globalization 4.0 pushing forward and cross-border transfer at an all-time high, people from across the globe have financial stakes in American companies (and vice-versa). To help keep tabs on all of these foreign-owned companies and their operations, the IRS requires foreign-owned companies to fill out specific forms.

One of these forms — Form 5472 — is required by any company that has at least one foreign owner with at least a 25% stake in the company. But how does Form 5472 work, and what do you need to know to submit accurate tax information?

All foreign-owned entities (both LLCs and C Corps) must file IRS Form 5472 with their income tax if they have a foreign shareholder that directly or indirectly owns 25% (or more) of the company. Form 5472 is applicable to both U.S. companies with foreign stakeholders and foreign companies that do business in the United States. Technically, Form 5472 is only required when companies have a “reportable transaction” during the period, but virtually all businesses will have at least one of these reportable transactions, which include sales, rentals, property liquidation, commissions, interest, etc. You can see the full list in Part IV of Form 5472.

Like most IRS forms, Form 5472 can be a little tricky to dissect. The IRS’s official definition is “[Form 5472 is used] to provide information required under sections 6038A and 6038C with reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.” Yeah, that’s a mouthful.

Let’s cut through the red tape a little. Form 5472 is used to sniff out tax fraud. Companies that are foreign-owned or have foreign shareholders with a significant vested interest can attempt to shelter transactions. They may say that U.S. transactions happened in a foreign area or that foreign transactions happened in the United States. Without Form 5472, the IRS is in the dark. Many foreign-owned companies are incredibly difficult to audit, and foreign investors may be essentially bulletproof to IRS audits, especially if they reside overseas.

Shareholders themselves are not responsible for Form 5472 (though they are responsible for the “partner” form, Form 5471). The corporation itself must file the form with its end-of-year tax documents. Thus, any penalties arising from Form 5472 are not against the foreign shareholder; they’re against the corporation. Of course, there’s a little double-dipping happening here, since Form 5471 is almost certainly required by the foreign shareholder.

Both disregarded entities and reporting corporations that are 25% foreign-owned ultimately or indirectly by a foreign person are subject to Form 5472. To help clarify that sentence, let’s break down each of those core components.

  • Disregarded Entity: Ever since the Tax Cuts and Jobs Act of 2017, foreign-owned, single-member LLCs must also file a Form 5472 (along with a Form 1120). Technically, single-member LLCs are disregarded entities for traditional tax purposes. However, in the context of Form 5472, the IRS treats foreign-owned single-member LLCs as corporations.
  • Reporting Corporation: C-corps with at least 25% foreign ownership and any reportable transactions are considered “reporting corporations” (technically, this also includes LLCs since the IRS treats them as corporations for the purposes of this form).
  • Foreign person: The IRS defines a foreign person as: a) someone who is not a citizen or resident of the United States, b) any foreign estate or foreign trust (see section 7701(a)(31)), or c) any foreign government, agency, or instrument (of a government or agency) that is engaged in the conduct of a commercial activity (see section 892)
  • 25% Foreign-owned: This includes any foreign person with a 25% (or more) stake in the corporation.
  • Indirect ownership: The IRS calls indirect foreign-owners “related parties.” In this case, these are foreign people that are indirect shareholders. There are multiple sections that define the various ways this works, including: a) 267(b), b) 707(b)(1), and c) Section 482

To learn more, see the IRS’s detailed Form 5472 instructions.

Let’s cut to the chase: filing Form 5472 is notoriously difficult. The IRS’s Paperwork Reduction Notice — which details estimated time-to-completion for various tax forms — expects that it will take corporations around 24 hours to fully fill out this form. We’ll give a very brief rundown of each section, but it’s highly recommended to get in touch with tax professionals to help you navigate this notoriously complex form — especially since the foreign persons themselves will be simultaneously filling out a form 5471 (which takes even longer and requires even more details).

This is the tricky part. Due to the scale and scope of this particular form, we aren’t going to give any play-by-play advice. Your corporation will be required to fill out this form based on the information of the foreign person(s), and a single Form 5472 contains enough space for 2 direct and 2 indirect foreign owners.

Note: You can attach a document for any additional individuals.

To complete Form 5472, you will need a variety of other forms, including but not limited to:

You will also need to be well-versed in tax section code. In other words, this is a form that you will want to fill out with help from your tax professional.

Let’s talk about the stick. Failure to file a Form 5472 will result in a penalty of $25,000. Failure to keep records in accordance with section 1.6038A-3 will result in an additional fine of $25,000. After 90 days, an additional $25,000 fine will be applied to the corporation, with additional $25,000 fines coming every 30 days thereafter.

Obviously, any fraudulent filing or information withholding is also subject to criminal charges via sections 7203, 7206, and 7207. So, this is a regulatory-heavy document that can quickly result in significant fines and a hefty regulatory burden.

No! The IRS defines foreign persons (in the context of Form 5472) as those who are not citizens or residents of the United States.

Very unlikely. The IRS rarely uses criminal charges during the tax process. Typically, only around 500 people are jailed for IRS tax fraud annually. To be clear, the only way you will face criminal penalties for Form 5472 is if you withhold information or submit fraudulent information. Failure to file is not a criminal charge. However, failing to file a Form 5472 can accrue massive civil penalties. Not only will you be fined for Form 5472, but you may also be fined for various other forms, especially related forms.

You are required to submit Form 5472 by April 15th each year. The only exception to this rule is LLCs operating under a different tax year, who should consult with their tax professional to figure out their posting requirements.

Taxes are hard. For corporations and LLCs that are foreign-owned, the tax filing process is drenched in footnotes, complex subsections, and time-sapping information documents. We can help. At Lanyap Financial, we give businesses the advice, strategies, and resources they need to take control of their taxes and financials. Contact us to learn how we can help you with your Form 5472 today.

Lanyap Financial is a tech-based accounting and financial services firm that specializes in streamlining their clients’ financial operations through FinTech software and cloud-based applications.