Reminder to Foreign Owned U.S. Corporations – File Information Returns
Separate from the obligation of a U.S. taxpayer to file their tax returns is an obligation to file various information returns required under the U.S. Internal Revenue Code (“Code”). Penalties for failure to file information returns are separate from payments relating to underpayment of taxes. In many cases, especially with respect to U.S. corporations that otherwise have little or no taxable income, the penalties for failure to file applicable information returns can be significantly greater than their U.S. tax liabilities.
For example, Section 6038A of the Code requires an information return for U.S. corporations with respect to which more than 25-percent of the corporation (by vote or value) is owned at any time during the taxable year by one foreign shareholder. Unless an exception applies, such U.S. corporations must file a Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business), which must be attached to the reporting corporation’s income tax return. The Form 5472 requires disclosure of information regarding certain of the corporation’s foreign shareholders and any transactions between it and such shareholders during the tax year. Section 6038C of the Code places a similar information return requirement on foreign corporations treated as engaged in a trade or business within the United States.
Section 6038A of the Code also requires that the U.S. corporation maintain applicable records (i.e., books, papers, or other data) to determine the correct treatment of transactions with related parties.
Penalties imposed for failure to file information returns are irrespective of the corporation’s filing of its tax return and payment of tax liabilities. For example, if a taxpayer has underpaid its taxes, a penalty is generally added to the taxpayer’s tax liability equal to 20 percent of the portion of the underpayment. However, the penalty under Section 6038A of the Code for a failure to timely file the Form 5472 is $10,000 for each taxable year with respect to which such failure occurs. If the failure continues for more than 90 days after which the corporation has been notified of the failure, an additional penalty of $10,000 for each following 30-day period is added.
A reasonable cause exception, applied on a case by case basis, may apply to mitigate these penalties. The reasonable cause exception may be applied more liberally with respect to small corporations (with gross receipts for a taxable year of $20,000,000 or less) that had no knowledge of the requirements imposed by Section 6038A of the Code, have limited presence in and contact with the United States, and promptly and fully comply with all requests to file Form 5472, and to furnish books, records, or other materials relevant to applicable transactions.
The Code requires many types of information returns and taxpayers should be diligent in determining their information reporting obligations.
Penalties for failure to file applicable information returns are not based on a filer’s U.S. tax liability and can be substantial.
If you have any questions regarding the filing obligations or penalties discussed herein, please contact Mark A. Goldsmith 212.704.6255 or Amie N. Broder 212.704.6225
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