TITLE: Form 5472 Penalty Relief: IRS Clarifies the 4 Tests for Small Foreign-Owned US Companies
Reasonable Cause Relief from the $25,000 Form 5472 Penalty
The IRS has clarified when small foreign-owned US companies may receive reasonable cause relief from the $25,000 Form 5472 penalty.
Chief Counsel Advice 202617012, released on 24 April 2026, says the IRS should apply the reasonable cause exception “liberally” when a small corporation satisfies four conditions. The relief is helpful, but it is not automatic. You must still file Form 5472, maintain records and respond fully to IRS requests.
This update matters if you are a non-US owner of a Wyoming, Delaware, Texas or California LLC or corporation, or if your UK, EU, Canadian or Australian business uses a US entity for ecommerce, digital services or cross-border trade.
Start with the core rule: relief does not remove the filing duty
Section 6038A generally applies to a domestic corporation that is at least 25% foreign-owned and has reportable transactions with related parties.
Form 5472 is used to report those transactions. Common examples include:
- Capital contributions from a foreign owner.
- Payments between a US company and its overseas parent.
- Loans, reimbursements or management fees.
- Transfers of inventory, intellectual property or other property.
- Transactions involving a foreign-owned single-member LLC treated as a disregarded entity for US tax purposes.
The IRS has continued its long-standing practice of automatically assessing the $25,000 penalty for late, missing or substantially incomplete Forms 5472. An additional $25,000 penalty may apply for each 30-day period after the IRS gives notice and the failure continues beyond 90 days.
The new guidance may help qualifying companies request relief. However, it does not excuse the original Form 5472 filing or the requirement to keep supporting records. The IRS Form 5472 guidance and Treasury Regulation §1.6038A-4 remain important reference points.
Pass all four tests for the small-corporation procedure
The IRS says all four conditions must be established before it applies the reasonable cause exception liberally.
1. Keep worldwide gross receipts at or below $20 million
Your company must have overall gross receipts of $20 million or less for the relevant tax year.
This is not limited to US receipts. The Chief Counsel Advice distinguishes this test from other rules that may look only at US gross receipts.
For example, a foreign-owned Delaware corporation with $3 million of US sales and $8 million of UK, EU and Canadian sales may remain within the $20 million threshold. The company should retain its consolidated sales reports, accounting records and filed accounts to support the calculation.
Do not rely only on the size of the US bank account. Use worldwide gross receipts for the taxable year.
2. Show that you did not know about the section 6038A requirements
You must establish that the company had no knowledge of the Form 5472 and section 6038A reporting requirements when the failure occurred.
This test is fact-sensitive. The IRS may consider:
- Whether the company had previously filed Form 5472.
- Whether its owners controlled another company that had filed Form 5472.
- Whether the company used a professional accountant or tax preparer.
- Whether the company received previous IRS notices.
- Whether the company had systems designed to identify related-party transactions.
A non-US resident operating a Wyoming single-member LLC may have a stronger case if the LLC had no prior US filing history, the owner had never dealt with Form 5472 and the omission resulted from a genuine misunderstanding.
However, simply saying “I did not know” is not enough. Prepare a written explanation supported by evidence. Explain when the company was formed, who handled its books, what advice or filing process was followed, and when the Form 5472 obligation was discovered.
3. Demonstrate limited US presence and contact
The company must show limited presence in and contact with the United States.
The IRS may consider:
- Where the directors, officers and managers live.
- The number and size of US customer transactions.
- Whether the company has US employees or offices.
- Whether it interacts regularly with US federal, state or local authorities.
- The extent of its US operations beyond the legal entity itself.
This does not mean a company must have no US activity. A foreign-owned California corporation selling through a US warehouse may have more US contact than a Wyoming LLC used only to receive platform payments.
For international sellers in the UK, EU, Canada and Australia, document the operating model clearly. Keep evidence showing where management decisions are made, where staff work, where inventory is held and how the US entity is used.
4. Respond promptly and completely to the IRS
The final test is operational. If the IRS requests Form 5472, books, records or materials relating to reportable transactions, respond promptly and fully.
Do not send a partial response and wait for another notice. Build a complete response pack containing:
- Corrected or late Forms 5472.
- The related pro forma Form 1120, where required.
- Bank statements and transaction schedules.
- General ledger extracts.
- Intercompany agreements and invoices.
- Details of capital contributions, loans and reimbursements.
- Ownership records.
- A signed reasonable cause statement.
- A clear index explaining the documents provided.
The IRS may assess whether your response was timely, complete and internally consistent. Repeated follow-up requests, unexplained changes or missing transaction details can weaken the relief request.
The IRS Chief Counsel Advice 202617012 also confirms that the written statement should be made under penalties of perjury. The advice is not binding precedent, but it shows how the IRS may evaluate the small-corporation procedure.
Example: a non-US owner who missed Form 5472
Suppose a UK resident owns a Wyoming single-member LLC. The LLC received payments from an ecommerce platform, paid software costs and received an initial capital contribution from its owner. The owner believed that having no US employees meant there were no US information-reporting obligations.
The LLC has worldwide gross receipts of $700,000. It has no US office, no US employees and limited contact with US authorities. It has never filed Form 5472.
The company may be able to build a reasonable cause request if it can establish all four tests. It should:
- Calculate worldwide gross receipts for the affected year.
- Prepare the missing Form 5472 and any required pro forma Form 1120.
- Create a timeline showing when the obligation was discovered.
- Explain the original misunderstanding without overstating the facts.
- Document its limited US presence.
- Respond quickly to every IRS request.
- Introduce a recurring compliance process for future years.
Do not assume the penalty disappears automatically. The company must make an affirmative showing to the IRS.
Review the new Form 5471 Schedule E reporting
A separate 2026 change affects certain controlled foreign corporations and US shareholders filing Form 5471.
Section 70352 of Public Law 119-21 repealed the one-month deferral election under section 898(c)(2) for tax years beginning after 30 November 2025. Some affect
