IRC § 6038A: The Mandatory $25,000 Annual Penalty
Under Internal Revenue Code Sections 6038A and 6038C, any US corporation that has at least one 25% foreign shareholder must file an annual information return on Form 5472.
In 2017, Treasury Regulations extended this requirement to foreign-owned single-member LLCs (disregarded entities). Even if the LLC conducted zero US-sourced commercial activity and owes $0 in US income taxes, Form 5472 must still be submitted along with a "pro forma" Form 1120.
A penalty of $25,000 is assessed for failure to timely file Form 5472, or for filing an incomplete form. If the failure continues for more than 90 days after IRS notification, an additional $25,000 penalty is assessed for each 30-day period thereafter.
What Counts as a "Reportable Transaction"?
Many founders think "we haven't launched yet, so we have no transactions." For Form 5472 purposes, the following are reportable:
- Capital Contributions: Depositing founder funds into the company’s Mercury or Brex account to pay legal fees or initial runway.
- Founder Loans: Any money loaned between the foreign founder and the entity.
- Expense Reimbursements: The entity paying the founder back for incorporation fees, domain purchases, or server hosting.
- IP & Technology Assignment: Formal transfer of codebase or intellectual property into the US company.
Deadlines and Submission Methods
- Filing Deadline: Due April 15th for calendar-year entities (or March 15 for certain fiscal entities).
- 6-Month Extension: Filing IRS Form 7004 before April 15 grants an automatic extension to October 15th.
- How to File: For corporations, it is e-filed with Form 1120. For single-member foreign-owned LLCs, pro forma Form 1120 with Form 5472 attached must be faxed or mailed to the dedicated IRS Ogden Center.