Our Client Received a $25,000 Form 5472 Penalty. Here's How We Responded

The surprising part was that the client's U.S. company had very little activity and owed no U.S. income tax. The problem was Form 5472.

The client's situation

The client lives in South America and formed a single-member Florida LLC to work with a future U.S. customer. The project was delayed, so the company spent its first year mostly dormant. He funded the LLC with a few thousand dollars, paid the formation and registered agent fees, and covered a couple of software subscriptions. There were no sales.

The formation service he used told him the company would not have to file anything unless it made money. Almost two years later he read about Form 5472 online, prepared a pro forma Form 1120 himself, and mailed it in late. A few months after that, the penalty notice arrived.

What went wrong

Two things happened. First, the form was filed well after its due date, and late Forms 5472 are frequently assessed the $25,000 penalty automatically, before anyone at the IRS reads an explanation. Second, the client included no statement explaining why the filing was late, so there was nothing on file for the IRS to weigh.

The tax or reporting requirement

A U.S. single-member LLC owned by a foreign person is disregarded for income tax, but for reporting purposes it is treated as a corporation. It must file Form 5472, attached to a pro forma Form 1120, for any year in which it has reportable transactions with its foreign owner or other related parties.

• Money the owner puts into the LLC is reportable.
• Fees and expenses the owner pays on the LLC's behalf are reportable.
• Distributions and loans in either direction are reportable.
• The filing is due by the 15th day of the fourth month after year-end (April 15 for calendar-year companies), with a six-month extension available on Form 7004.

The potential IRS exposure

The penalty for failing to file a timely, complete Form 5472 is $25,000 per form, per year. If the IRS sends a notice and the failure continues for more than 90 days, an additional $25,000 can accrue for each 30-day period. The IRS's first-time abatement policy generally does not apply to this penalty, so relief usually depends on showing reasonable cause.

How Chirino USA analyzed the situation

We started by confirming that the filing requirement actually applied, so we would not build an argument on a technical mistake. It did: the owner's contribution and the fees he paid were reportable. We then reviewed the form he filed to make sure it was complete and accurate, because a reasonable cause request is much stronger when the underlying filing is correct.

Next we built the facts that matter for reasonable cause:

• A first-time foreign owner with no U.S. tax background and very limited contact with the United States.
• Written statements from the formation service saying no filing was required without income.
• No income tax was due for the year, and nothing was hidden — the transactions were small and fully documented.
• He filed on his own initiative, before any IRS contact, as soon as he learned about the requirement.

The Form 5472 regulations specifically ask the IRS to consider the position of small companies that had no knowledge of the requirement and limited presence in the United States, provided they comply promptly once they find out. That framework fit this client closely.

How we addressed the issue

We prepared a written reasonable cause statement, signed under penalties of perjury, with a clear timeline and copies of the supporting documents: the formation service's emails, bank records showing every transaction, and proof of the date he filed. We responded within the deadline printed on the notice, which protects the taxpayer's ability to appeal if the first request is denied.

We also put the next filing on our calendar with an extension, so the following year would be on time.

The result

In this matter the IRS accepted the reasonable cause explanation and removed the $25,000 penalty in full. The company now files every year, on time, as part of a simple annual routine.

That outcome reflected this client's specific facts and documentation. Not every request is accepted, and no one can promise that a penalty will be removed, but a well-documented response gives the IRS a real basis to grant relief.

What other taxpayers in similar situations should know

• Do not ignore the notice. The response deadline matters, both for relief and for appeal rights.
• "I didn't know" is rarely enough on its own. The surrounding facts — who you relied on, your experience, how quickly you corrected the problem — carry the weight.
• Fix the underlying filing first. A reasonable cause request attached to an incomplete form is weaker.
• Check the other years. If one year was missed, others often were too.

How Chirino USA can help

If you own a U.S. company from outside the United States and are concerned about a missing or incorrect Form 5472, Chirino USA Accountants & Advisors can review your filings, identify potential exposure, and help determine the appropriate path forward. You can email us or message us on WhatsApp, in English or Spanish.

Sources and official references

• IRS — About Form 5472
• IRS — Instructions for Form 5472
• eCFR — Treas. Reg. §1.6038A-1 (foreign-owned disregarded entities)
• eCFR — Treas. Reg. §1.6038A-4 (penalties and reasonable cause)