Form 5471 vs. 5472: What’s the Difference?
Understand your IRS reporting obligations by learning how Form 5471 and 5472 differ based on the direction of international business ownership.
The Internal Revenue Service (IRS) uses informational returns to maintain transparency in international business. Among these, Form 5471 and Form 5472 serve distinct purposes in monitoring cross-border financial structures. While both forms are attached to a filer’s annual tax return, they address different scenarios and are often a source of confusion. Understanding their specific triggers and filing requirements is necessary for U.S. international tax compliance.
Purpose and Filers of Form 5471
Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” is concerned with outbound investments by U.S. persons with a significant interest in a foreign corporation. A “U.S. person” includes citizens, residents, domestic partnerships, corporations, and trusts. The form provides the IRS with detailed financial information about the foreign entity, helping to prevent the use of offshore structures to evade U.S. tax.
The filing requirement for Form 5471 is organized into several categories. A primary trigger involves a “U.S. shareholder” of a Controlled Foreign Corporation (CFC), which is a foreign corporation where U.S. shareholders own more than 50% of the vote or value. A U.S. shareholder is a U.S. person who owns 10% or more of the foreign corporation’s stock.
Other categories capture specific events. For instance, a U.S. person who becomes an officer or director of a foreign corporation where another U.S. person acquires a 10% or greater stake may need to file. A U.S. person who acquires stock resulting in 10% ownership, or disposes of stock to fall below that threshold, must also file. Another category applies to a U.S. person controlling a foreign corporation for at least 30 consecutive days.
The complexity of Form 5471 comes from its detailed schedules, which function like a tax return for the foreign corporation. Depending on the filer’s category, they may need to complete schedules detailing the foreign corporation’s income statement, balance sheet, earnings and profits, and transactions with related parties.
Purpose and Filers of Form 5472
In contrast to Form 5471, Form 5472 focuses on inbound transactions. Its title is “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.” This form is filed by the U.S. entity itself, not its foreign owners. Its purpose is to disclose “reportable transactions” between the U.S. entity and its foreign related parties to prevent improper income shifting.
The primary filer of Form 5472 is a “reporting corporation,” which is either a U.S. corporation with at least one 25% foreign shareholder or a foreign corporation engaged in a U.S. trade or business. This includes foreign-owned U.S. disregarded entities (DEs).
A filing obligation is triggered when the reporting corporation engages in a “reportable transaction” with a foreign related party. Reportable transactions are broadly defined and include any exchange of money or property, such as sales of inventory, rents, royalties, interest payments, and service fees.
A “related party” for Form 5472 purposes includes any direct or indirect 25% foreign shareholder, as well as any person related to the reporting corporation under Internal Revenue Code sections like 267 or 707. A separate Form 5472 must be filed for each foreign or domestic related party with which the reporting corporation had reportable transactions.
Core Differences in Reporting Obligations
The distinction between the forms lies in the direction of ownership and the filer’s perspective. Form 5471 is an outbound form, filed by a U.S. person reporting their ownership in a foreign corporation. Form 5472 is an inbound form, filed by a U.S.-based entity reporting transactions with its foreign owners and related parties.
This difference is clear in an example: a U.S. citizen who owns 15% of a German company might file Form 5471 to report on that company. If that same German company establishes a U.S. subsidiary to handle distribution, the U.S. subsidiary would file Form 5472 to report transactions, such as inventory purchases, with its German parent. The two forms address opposite sides of an international corporate structure.
Penalties for Filing Failures
The IRS enforces the filing requirements for both forms with significant monetary penalties. For Form 5471, a failure to file a complete and accurate form by the due date results in an initial penalty of $10,000 for each foreign corporation per year.
If the IRS sends a notice of failure and the issue continues for more than 90 days, a continuation penalty of $10,000 is assessed for each 30-day period. The maximum continuation penalty is capped at $50,000, bringing the potential total penalty to $60,000 per form, per year.
The penalties for Form 5472 are higher. The initial penalty for failing to file a complete Form 5472 or maintain required records is $25,000 per required form for each related party.
Similar to Form 5471, a continuation penalty applies if the failure continues for more than 90 days after an IRS notification. This penalty is $25,000 for each 30-day period, but there is no maximum cap, meaning the total penalty can grow indefinitely.