The Tax Return Was Filed, but Form 5472 Was Incorrect

The pro forma Forms 1120 were there. But the Forms 5472 attached to them reported almost nothing.

The client's situation

The client lives in the Middle East and owns a U.S. single-member LLC that purchases inventory from his family's foreign company and resells it on U.S. marketplaces. A low-cost online service prepared the filings each year. When he hired us to review the company before expanding, we read the prior returns line by line.

What went wrong

The Forms 5472 listed the owner and reported his initial capital contribution, but nothing else. They did not report the inventory purchased from the family company — which was a foreign related party — and they did not report the regular distributions to the owner. In one year, the foreign owner's information was incomplete.

The tax or reporting requirement

Form 5472 must report reportable transactions with each foreign related party, not just the owner. A related company owned by the same family can be a related party in its own right, which may require its own Form 5472. The form must be complete and accurate; a filing that leaves out required information can be treated as a failure to file.

The potential IRS exposure

A substantially incomplete Form 5472 can carry the same $25,000 penalty as a missing one, per form and per year. With multiple related parties and three affected years, the potential exposure was well into six figures, even though every form had technically been "filed."

How Chirino USA analyzed the situation

We mapped the ownership of the family company to confirm it met the related-party definition. We then reconciled each year's purchases, payments and distributions against the LLC's books and bank statements, so we knew exactly what each corrected form needed to show. We also reviewed whether the inventory sales created U.S. business income that should be reported on the owner's personal return.

How we addressed the issue

We prepared amended pro forma Forms 1120 with corrected Forms 5472 for each affected year — one for the owner and a separate form for the related family company — along with an explanation of the corrections. We also addressed the owner's income tax filings based on the analysis of the sales activity, and set up bookkeeping categories so related-party purchases are tracked going forward.

The result

The filings now reflect the company's actual related-party activity. Correcting incomplete forms on our own initiative, with a clear explanation, places the client in a much better position than having the IRS discover the omissions during a review of the company's activity.

What other taxpayers in similar situations should know

• A filed Form 5472 is not the same as a correct Form 5472.
• Related parties can include companies owned by your family, not just you.
• Purchases, sales, loans and distributions all belong on the form.
• If your filings were prepared by a low-cost service, have at least one year reviewed.

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)