Form 5472 Penalties: Understanding the $25,000 Risk and Relief Options

A client calls. They formed a U.S. LLC a few years ago with a business partner who is a Canadian citizen. They filed their taxes every year. They never heard of Form 5472. The IRS just sent them a bill for $75,000 in penalties — $25,000 for each of three years they failed to attach the form to their corporate return.

No underreported income. No fraud. Just a missing information return they didn't know they had to file.

This is not a hypothetical. The IRS began systematically assessing these penalties in volume around 2018, and the Taxpayer Advocate has publicly condemned the practice as "convoluted and punitive." But condemning it and stopping it are two different things. The assessments are still coming. The question is whether you're on the list.

What Form 5472 Actually Is

Form 5472 — formally the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business — is not a tax return. You don't owe tax on it. You don't pay anything by filing it. Its entire purpose is transparency: the IRS wants visibility into transactions between U.S. businesses and their foreign-related parties so it can monitor transfer pricing and detect cross-border income shifting.

The legal authority sits in IRC §§6038A and 6038C. Section 6038A covers 25% foreign-owned domestic corporations; Section 6038C covers foreign corporations engaged in U.S. trade or business. The form is filed as an attachment to Form 1120 (or a pro forma 1120) by the due date of the corporation's income tax return, including extensions.

The form is filed per related party. If your U.S. corporation had reportable transactions with three different foreign-related parties during the year, you file three separate Form 5472s — and face three separate $25,000 penalties if you don't.

Who Has to File

Two categories of businesses are reporting corporations under §6038A:

Category 1: 25% Foreign-Owned U.S. Corporations. If a foreign person — meaning a non-U.S. individual, corporation, partnership, trust, or estate — owns directly or indirectly at least 25% of the total voting power or total value of all classes of stock at any point during the tax year, the corporation is a reporting corporation. The constructive ownership rules of IRC §318 apply, with modifications. You don't have to own a majority. You don't have to be controlled by the foreign person. Twenty-five percent is the threshold, and the IRS measures it at any point during the year, not just at year-end.

Category 2: Foreign-Owned U.S. Disregarded Entities (Since 2017). This is where most of the surprise assessments come from. Treasury Reg. §1.6038A-1 was amended effective January 1, 2017, to require foreign-owned single-member LLCs — even those treated as disregarded entities for income tax purposes — to file Form 5472. The LLC is treated as a corporation solely for the purpose of this reporting requirement and must file a pro forma Form 1120 as a cover sheet, with Form 5472 attached.

"Disregarded" does not mean exempt. That confusion has generated thousands of penalty assessments. The fact that the LLC pays no separate federal income tax has nothing to do with its Form 5472 obligation. Even a dormant LLC with zero revenue must file if it had any reportable transactions — and the initial capital contribution from the foreign owner counts as a reportable transaction.

What Transactions Must Be Reported

Not every transaction triggers Form 5472 — only reportable transactions with a related party. The related-party definition under §6038A is broad: it includes any 25% foreign shareholder, any person related to such shareholder under the constructive ownership rules, and any officer, director, or certain employees.

Reportable transactions include sales of inventory, property transfers, rents, royalties, management fees, service charges, amounts loaned or borrowed, and insurance premiums — essentially any financial interaction between the U.S. reporting entity and a foreign-related party. For disregarded entities, this list was expanded in 2017 to explicitly include capital contributions from and distributions to the foreign owner, which is why even dormant LLCs trigger the filing requirement the moment they're funded.

There is a de minimis exception under Reg. §1.6038A-1(h) for corporations with gross receipts under $10,000,000 and aggregate transactions under $5,000,000 with each related party, but it applies only to the reporting corporation itself — not to disregarded entities.

The Penalty Structure: Where $25,000 Is Just the Starting Point

The penalty framework under §6038A(d) works in two layers:

Initial Penalty. A flat $25,000 is assessed for each failure to file a timely, complete Form 5472 — or for filing a substantially incomplete form. The IRS treats this as a strict-liability trigger. It does not matter whether you had any tax liability. It does not matter whether the missing form would have changed your tax return by a single dollar. The penalty is assessed per form per year. Three missing forms across three years means $75,000. Three related parties in one year means $75,000 for that year alone.

Continuation Penalty. If the IRS sends you a notice of failure and the failure continues for more than 90 days after notification, an additional $25,000 penalty applies for each 30-day period (or fraction thereof) that the failure continues. There is no maximum. In theory, six months of noncompliance after an IRS notice adds another $150,000 on top of the initial $25,000 — per form.

Penalty Type	Amount	Trigger
Initial penalty	$25,000 per form per year	Failure to file, late filing, or substantially incomplete filing
Continuation penalty	$25,000 per 30-day period per form	Failure continues 90+ days after IRS notification
Record-keeping penalty	$25,000 per year	Failure to maintain required books and records under Reg. §1.6038A-3
Statute of limitations extension	N/A (procedural)	Filing failure extends the assessment period under §6501(c)(8)

That last row matters more than people realize. Under IRC §6501(c)(8), a failure to file Form 5472 extends the statute of limitations on the entire related tax return — not just the international reporting piece. The IRS has three additional years from the date it receives the required information to assess any tax related to the transactions that should have been reported. If you never file, the limitations period never starts running.

The Farhy Battle: The Most Important Tax Court Fight You've Never Heard Of

There is a live circuit split right now over whether the IRS has the legal authority to administratively assess these penalties — or whether it must sue you in federal district court to collect them. The distinction matters enormously for your defense options.

Farhy v. Commissioner — Tax Court (April 2023). Alon Farhy owned two Belizean corporations from 2003 to 2010 and failed to file Form 5471. The Tax Court ruled in his favor in Farhy v. Commissioner, 160 T.C. No. 6 (2023), holding that the §6038(b) penalties were not "assessable penalties" within the meaning of §6201(a). If the IRS wanted to collect, it had to file a civil lawsuit — a far heavier burden. The decision sent shockwaves through the tax bar and was quickly applied to Form 5472 penalties under §6038A, which mirrors the same statutory structure.

D.C. Circuit Reversal (May 2024). The government appealed, and on May 3, 2024, the U.S. Court of Appeals for the D.C. Circuit reversed the Tax Court in Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024). The appeals court held that based on the text, structure, and function of §6038, Congress authorized administrative assessment — and allowing the IRS to collect one related penalty through administrative means while requiring a lawsuit for the other would produce an "inexplicable asymmetry." The D.C. Circuit's holding is binding only in the D.C. Circuit's jurisdiction (D.C. residents and taxpayers living outside the U.S.).

Mukhi v. Commissioner — Tax Court Doubles Down (November 2024). In a stunning en banc ruling (15–1) issued November 18, 2024, the full Tax Court declined to follow the D.C. Circuit's Farhy opinion in Mukhi v. Commissioner. The case was appealable to the Eighth Circuit, not the D.C. Circuit, so the Tax Court was not bound by the appellate reversal. The Tax Court reaffirmed that §6038(b) penalties are not administratively assessable — and by extension, neither are the identical §6038A penalties that govern Form 5472. This creates a genuine circuit split and sets the stage for Eighth Circuit review and potentially the Supreme Court.

The practical state of play as of early 2026: the Tax Court will not sustain these penalties as administratively assessed, but the D.C. Circuit will. Where you live may determine your legal rights. Taxpayers in circuits that haven't weighed in may have strong grounds to challenge assessment authority.

This is not an invitation to simply ignore the filing requirement. Farhy and Mukhi address how the IRS collects the penalty — not whether the underlying obligation exists. The obligation is unambiguous. But if you've already been assessed a penalty, the Farhy/Mukhi split may be the most important litigation development in your defense.

IRS Enforcement: Systemic, Not Discretionary

One thing both sides of the Farhy debate agree on: the IRS has been assessing these penalties systemically and at scale. According to the National Taxpayer Advocate, the agency does not contact taxpayers before assessing the initial penalty. There is no pre-assessment notice, no opportunity to explain, no chance to cure the failure before the bill arrives. The return is processed, the missing form is flagged, and the $25,000 assessment issues automatically.

This matters strategically. Because the assessment is systemic, the first time many taxpayers learn they have a Form 5472 problem is when they receive a penalty notice. At that point, the IRS has already assessed — and you're fighting to abate, not to prevent. Your window to cure without a continuation penalty is 90 days from the date of the notice. Miss that window and the meter starts running at $25,000 per month.

Relief Options: What Actually Works

The IRS does not make penalty abatement easy for Form 5472, but it's not impossible either. There are four legitimate paths.

1. Reasonable Cause Under Reg. §1.6038A-4(b)(2)(iii)

The statute provides that penalties will not be imposed if the failure is due to reasonable cause and not willful neglect. The regulations spell out the analysis: was the taxpayer's failure the result of exercising ordinary business care and prudence? Courts and the IRS look at the nature of the error, the sophistication of the taxpayer, reliance on professional advice, and the steps taken to correct the failure once discovered.

Ignorance of the law is generally not reasonable cause — but there are narrow exceptions. The 2017 expansion to foreign-owned disregarded entities was a genuine trap for the unwary: foreign founders of U.S. LLCs were (and still are) frequently unaware that "disregarded for income tax" does not mean "disregarded for information reporting." A well-documented showing that the taxpayer relied on a tax professional who failed to advise them of the requirement — and that the taxpayer otherwise had a good compliance history — has been successful in abatement requests. The key word is documented.

Reasonable cause abatement for these penalties is requested after assessment, not before. You'll typically submit a written request to the IRS Service Center that issued the notice, or raise it at an Appeals Conference or CDP hearing.

2. First-Time Penalty Abatement (FTA)

IRS Policy Statement 20-1 provides for First-Time Penalty Abatement for taxpayers with a clean compliance history. The IRM at §20.1.1.3.4 describes the criteria: the taxpayer must have filed (or had an extension for) all required returns for the prior three years, must have no prior penalty assessments for the same type of penalty in the prior three years, and must have paid or arranged to pay any tax due.

There is a critical catch specific to Form 5472. The IRM at §8.11.5 states that FTA relief provisions generally do not apply to event-based filing requirements — and Form 5472 is triggered by an event (a reportable transaction), not simply by the passage of time. However, there is an exception in the IRM for certain systemically assessed penalties with Penalty Reference Number (PRN) 711, which is the code used for Form 5472 failures. Whether the exception applies to your specific situation depends on how the penalty was assessed and the IRS unit handling the case. It's worth requesting FTA and letting the IRS confirm or deny.

3. Delinquent International Information Return Submission Procedures (DIIRSP)

If you have never filed Form 5472 and have not yet been contacted by the IRS about the failure, the Delinquent International Information Return Submission Procedures allow you to come in voluntarily. You file the delinquent returns with a reasonable cause statement explaining why they weren't filed originally. The IRS may not assert penalties if the statement establishes reasonable cause — but this is discretionary, not guaranteed.

The DIIRSP requires that you are not currently under IRS examination, you are not under criminal investigation, and you have not previously been contacted about the delinquent return. If you've already received a penalty notice, you've missed the window for this procedure.

4. CDP Hearing and Appeals

When the IRS moves to collect — sending a Notice of Intent to Levy (Letter 1058) or filing a Notice of Federal Tax Lien — you have the right to a Collection Due Process (CDP) hearing under IRC §§6320 and 6330. The CDP hearing is where the Farhy/Mukhi arguments come into play in a live controversy context.

At a CDP hearing, you can raise the following challenges: (a) the underlying liability was incorrectly assessed — including the Farhy/Mukhi argument that the penalty was not legally assessable; (b) reasonable cause; (c) collection alternatives such as installment agreements or offers in compromise if you accept the liability; and (d) spousal defenses if applicable. The Tax Court has jurisdiction to review CDP determinations, which is how these cases reach Tax Court in the first place.

If you receive a Notice of Intent to Levy on a Form 5472 penalty, request a CDP hearing within 30 days. This is not optional. Missing the 30-day window limits your Tax Court rights significantly.

The Record-Keeping Requirement Nobody Mentions

The Form 5472 penalty isn't only for failure to file. IRC §6038A also requires reporting corporations to maintain sufficient records under Reg. §1.6038A-3 to establish the correctness of the corporation's federal income tax return, including records relevant to the correct treatment of transactions with related parties. Failure to maintain these records carries its own $25,000 annual penalty — separate from the filing penalty.

The record-keeping requirement means that even a corporation that files Form 5472 on time and completely is still at risk if an examination reveals that the underlying records don't support the reported transactions. Transfer pricing documentation — the analytical support for why intercompany prices are at arm's length — is the primary concern for large corporations, but even smaller entities need basic documentation of what each reported transaction was, why it occurred, and what the economic terms were.

Practical Checklist: Are You at Risk?

Work through these questions. If you answer yes to any of them, Form 5472 deserves a serious look.

• Does a non-U.S. person own 25% or more of your U.S. corporation at any point during the year?
• Is your U.S. LLC wholly owned by a non-U.S. individual or entity?
• Did your U.S. entity receive a capital contribution from a foreign owner — even at formation?
• Did your U.S. entity make any payment to, or receive any payment from, a foreign-related party for services, goods, rent, royalties, or interest?
• Did you loan money to or borrow money from a foreign-related party?
• Has your entity been in existence since before 2017 with a foreign owner, and did you review your filing requirements after the 2017 regulatory change?

If you're a trade contractor who has brought in a foreign investor, partnered with a family member abroad, or structured your entity with an overseas parent company, you need to run this analysis against every entity in your structure. The penalty applies at the entity level, not the individual level — but $25,000 per entity per year adds up fast.

The Bottom Line

Form 5472 is one of the most ruthlessly enforced information-return requirements in the tax code. The penalty starts at $25,000, multiplies by the number of related parties and the number of years, and has no cap. The IRS assesses it without warning, and the statute of limitations stays open until the information is provided.

The good news: the Farhy/Mukhi circuit split creates real legal uncertainty about the IRS's authority to administratively collect these penalties, and relief options exist for taxpayers who acted in good faith. The bad news: the underlying obligation is unambiguous, and the window to cure without penalty is narrow.

If there is any chance Form 5472 applies to your entity structure — past or present — run the analysis now. The $25,000 question is cheaper to ask than to answer after the fact.