IRS Clarifies Meaning of Reasonable Cause for Form 5472 Penalties

Under federal tax law, certain entities must file IRS Form 5472 to report specified transactions with related parties. To ensure compliance with this information return reporting obligation, Congress allows the IRS to impose significant penalties for delinquent and late filings. But typical of many federal tax penalties, reasonable cause for the delinquent or late filing provides an absolute defense to the IRS Form 5472 penalty.

Under governing regulations, a special rule applies for “small corporations” that fail to properly file an IRS Form 5472. Specifically, the regulation provides that small corporations should be subject to a more “liberal” reasonable cause standard if they meet certain requirements. On April 24, 2026, IRS Chief Counsel released Chief Counsel Advice Memorandum 202617012 that provides the agency’s interpretation of the reasonable cause exception applicable to small corporations.

IRS Form 5472

Although an IRS Form 5472 filing requirement may apply to certain foreign corporations and domestic disregarded entities, the majority of IRS Form 5472 filings apply to domestic corporations. For these corporations to have an information return obligation, they must be a “reporting corporation” that had a “reportable transaction” with a “related party.”

First, the corporation must be a “reporting corporation,” defined as a domestic corporation that has at least one foreign person who owns 25% or more of the vote or value of the corporation. For these purposes, complicated attribution rules apply.

In addition, the reporting corporation must have a “reportable transaction” with a “related party” in the tax year. Reportable transactions consist of transactions generally subject to abuse among parties who are not truly independent and negotiating at arms-length such as: (i) the sale or purchase of inventory and tangible property, (ii) rents and royalties, (iii) amounts paid and received for intangible property (e.g., copyrights and patents), (iv) consideration paid and received for services, (v) commissions, (vi) borrowings and loans, (vii) interest paid or received, and (viii) premiums paid or received for insurance. Related parties means: (i) any direct or indirect 25% foreign shareholder of the reporting corporation or specified parties as defined in Sections 267(b), 707(b)(1), or 482.

IRS Form 5472 Civil Penalties

The IRS may impose significant civil penalties against reporting corporations that fail to properly file an IRS Form 5472. Worse yet, these penalties apply per form and not per year—i.e., the IRS can impose multiple penalties for each filing obligation. In addition to an initial $25,000 penalty, the agency may impose continuation penalties of $25,000 after the IRS notifies the reporting corporation of the filing delinquency.

The penalties do not apply, however, if the reporting corporation can show reasonable cause. Under governing regulations, the reporting corporation must submit a written statement containing a declaration under penalties of perjury, asserting facts that support the reasonable cause defense. The regulations indicate that the burden is on the reporting corporation to convince the IRS that the penalty should be waived or abated.

The Small-Corporation Rule

Treasury Regulation § 1.6038A-4(b)(2) provides a special reasonable cause rule that applies to “small corporations.” Under the rule, the IRS must apply the reasonable cause exception “liberally” if a small corporation had no knowledge of the information return, the corporation had limited presence in and contact with the U.S., and the corporation promptly and fully complied with all requests from the IRS to file the information return and provide any relevant accounting records to the agency. The regulations define small corporation as a corporation that has gross receipts for the taxable year of $20 million or less.

IRS CCA 202617012

CCA 2022617012 provides the IRS’s interpretation of the small corporation exception, as applied by IRS Chief Counsel. Under the CCA, the agency must first determine whether the reporting corporation meets the small corporation definition and requirements. These include:

• The corporation must have gross receipts of $20 million or less for the taxable year in question;

• The corporation must establish lack of knowledge of the IRS Form 5472 filing requirements;

• The corporation must establish limited presence in and contact with the U.S.;

• The corporation must establish full and prompt compliance with the IRS requests to file the IRS Form 5472 and to provide any requested information.

Significantly, the CCA cautions and urges IRS examiners not to take the statements made in a reasonable cause statement at face value. Instead, the CCA pushes examiners to scrutinize the four requirements above. For example, the CCA suggests that examiners should consider whether the corporation or any of its related parties had previously filed IRS Forms 5472 to determine whether the corporation itself had knowledge of the information return. Concerning the corporation’s presence in and contact with the U.S., the CCA similarly advises that examiners should consider the experience and location of the corporation’s officers and managers, the number and size of transactions with customers located in the U.S., and the degree to which the corporation’s operations involved interactions with individuals, businesses, and federal, state, or local governments in the U.S. as a means to determine whether the corporation had “limited presence in and contact with the U.S.”

The CCA also provides the IRS’s interpretation of the term “liberally” as used in the regulations. According to the agency, the application of the liberal standard applies to the agency’s level of scrutiny in considering the corporation’s request for reasonable cause relief. In other words, the liberal standard does not relieve the corporation from making affirmative facts to support its reasonable cause defense, such as an honest and reasonable mistake of law or reliance on a tax professional. Therefore, the CCA cautions examiners that a small corporation will not qualify for reasonable cause relief, even under the liberal standard, if the corporation provides only conclusory statements and no factual representations or evidence to support a reasonable cause defense.

Conclusion

The CCA provides another reminder that the IRS will not simply grant reasonable cause relief against penalties merely by asking for relief. Instead, taxpayers must set forth their facts and the relevant law in a statement to the IRS that convincingly demonstrates the taxpayer is eligible for the penalty waiver or abatement. Small corporations that are eligible for the “liberal” application of reasonable cause should be mindful that conclusory statements without factual backup or evidence does not qualify for penalty relief under the IRS’s interpretation of the governing regulation.

For questions concerning this blog post or any other IRS civil or criminal matter, please contact me at mroberts@meadowscollier.com.