Can a $25,000 Form 5472 Penalty Be Removed? A Real Client Scenario

The honest answer is: sometimes. Here is a case where it was, and why.

The client's situation

The client is a retired professional living in Canada who formed a U.S. LLC to own a small vacation rental. He hired a U.S. preparer for his personal nonresident return, and the preparer never mentioned the LLC's own filing. When a new preparer flagged it two years later, the late pro forma Forms 1120 and Forms 5472 were filed, and the IRS assessed $25,000 for each year.

What went wrong

The client had done what most careful people would do — he hired a professional and gave him everything. The professional simply did not address the LLC's reporting.

The tax or reporting requirement

A foreign-owned single-member LLC must file Form 5472 with a pro forma Form 1120 each year it has reportable transactions with its owner. The penalty for a late or incomplete form is $25,000 per form, per year. Relief generally requires showing that the failure was due to reasonable cause — that the taxpayer exercised ordinary business care and prudence. The IRS's first-time abatement policy generally does not apply to Form 5472 penalties.

The potential IRS exposure

Two years of penalties had been assessed: $50,000 in total, plus interest. If the penalties were left unaddressed, collection would follow.

How Chirino USA analyzed the situation

Reasonable cause is about facts and evidence. We focused on the elements that typically carry weight:

• Reliance on a qualified professional who had all the relevant information — supported by the engagement letter and emails showing the LLC documents were provided.
• The owner's lack of U.S. business experience and limited presence in the United States.
• No tax was avoided; the LLC's rental activity was reported on his personal return.
• Immediate correction once the issue was identified, before any IRS contact.

How we addressed the issue

We prepared a reasonable cause statement for each year, signed under penalties of perjury, with the engagement letter, the emails, the personal returns and a clear timeline attached. We submitted it within the notice period and confirmed that the filings for both years were complete and correct.

The result

In this matter, the IRS accepted the reasonable cause explanation and removed both penalties. Our firm has successfully handled Form 5472 reasonable cause penalty matters like this one.

That said, results depend on the specific facts and documentation, and no one can guarantee that a penalty will be removed. What we can do is identify the facts that matter and present them clearly and on time.

What other taxpayers in similar situations should know

• A Form 5472 penalty can sometimes be removed, but it is not automatic.
• First-time abatement generally does not apply; reasonable cause is the usual path.
• Evidence matters more than explanation: engagement letters, emails, dates.
• Meeting the notice deadline preserves your options if the first request is denied.

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)