The $25,000 Form 5472 penalty on a Canadian-owned US LLC: what it is, and what can be done about it

What is the Form 5472 penalty?

It's a flat $25,000 for each taxable year in which a reporting corporation fails to furnish the information Form 5472 asks for, or fails to maintain the records section 6038A requires. Those are the two triggers, and they're in the statute:

The regulation carries the same figure and adds a sentence that catches people who did file: "The filing of a substantially incomplete Form 5472 constitutes a failure to file Form 5472." A form that's missing the parts the IRS considers material can be treated as though it never arrived.

Two limits belong right next to that. The first is the cap, which the next section unpacks: the same regulation imposes the penalty only once for a taxable year with respect to each related party, so the maximum for all such failures in a year is $25,000 per related party. The second is substantial compliance, and it applies to the incomplete-form problem directly:

One thing to keep straight from the start: this is a penalty, and it isn't tax. The pro forma Form 1120 a foreign-owned LLC files reports no income and produces no tax bill. A Form 5472 problem and a tax problem are separate questions, and an LLC can have the first without having the second.

For tax years beginning before January 1, 2018 the figure is $10,000 rather than $25,000, per IRM 20.1.9.5.4. The $25,000 isn't indexed for inflation. Section 6038A contains no adjustment mechanism, the annual IRS inflation revenue procedure doesn't list it, and the government-wide civil-penalty inflation statute expressly carves out penalties under the Internal Revenue Code.

Is the $25,000 per year, per form, or per entity?

Per related party, per taxable year, once. That's the sentence most pages on this topic leave out, and it's in the regulation in terms:

The IRS says the same thing to its own people, in plainer words: "The initial penalty is asserted once per related party per taxable year even if multiple infractions have occurred, e.g., failure to file Form 5472 and failure to maintain records for the same related party." (IRM 20.1.9.5.4.)

So for a Canadian who owns one US LLC and whose only related party is himself, a missing Form 5472 for a year and no records kept for that same year is one initial penalty for that year, not two.

Two things do carry their own penalty, and it'd be dishonest to leave them out. Each taxable year stands on its own, because the statute says $25,000 "for each taxable year with respect to which such failure occurs." And each related party stands on its own, because a separate Form 5472 is due for each related party the LLC had a reportable transaction with, and the regulation's cap is written per related party. An LLC that transacted with its owner and with the owner's Canadian corporation has two of them. Counting them is a question about your own file: "related party" reaches persons related under sections 267(b), 707(b)(1) and 482, which can pull in a spouse's company. Nothing here assumes you have only one.

What is the continuation penalty, and what starts the clock?

Nothing continues to accrue until the IRS mails a notice of the failure and a further 90 days go by. Missing the due date doesn't start it. That's the whole mechanism, and both the statute and the regulation turn on the mailing:

While it's running there's no ceiling on it. IRM 20.1.9.5.4 says the continuation penalty "is not subject to a maximum limit, it may continue to accrue until the failure is cured." Filing is what cures it, and the regulation says so:

One more piece of the mechanism, with its conditions attached: IRM 20.1.9.5.4 says that where both a reporting failure and a records failure continue with respect to the same related party, separate continuing penalties are asserted. That only bites after a notice of the failure has been mailed and the 90 days have run, only for as long as both failures are still continuing, and filing the Form 5472 ends the reporting side of it under the cessation rule above.

The regulation says "notice of the failure," and it publishes no test for telling that letter apart from a general balance notice. So this page won't tell you which letter you're holding. Reading the actual correspondence is one of the first things worth doing, and it's a fact question about your file.

Why does my LLC owe a US filing at all? I was told it's disregarded.

Because a rule written in 2016 carved out one purpose. Treas. Reg. 301.7701-2(c)(2)(vi)(A) says an entity that's disregarded as separate from its owner "is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A" where the entity is domestic and "One foreign person has direct or indirect sole ownership of the entity." It applies to taxable years of entities beginning after December 31, 2016. (eCFR.) Nothing about your income tax treatment changes. The LLC is still disregarded everywhere else. It just becomes a corporation for the one section that carries this filing duty.

The mechanics are unusual enough that people miss them even when they know about the form. Per the Form 5472 instructions (rev. 12/2024), a foreign-owned US disregarded entity "has no income tax return filing requirement" but "will now be required to file a pro forma Form 1120 ... with Form 5472 attached by the due date (including extensions) of that Form 1120." Only the name and address plus items B and E get completed on the 1120, "Foreign-owned U.S. DE" goes across the top, and it goes by fax or by mail to the IRS in Ogden, Utah. You can't e-file it.

Owners who are certain they had nothing to report get caught right here. For a foreign-owned disregarded entity the reportable-transaction net is drawn wider than most people assume. Part V of the instructions covers "amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity, including contributions to, and distributions from, the entity." Money you put into the LLC is a reportable transaction. Money you took out is a reportable transaction.

Whether the LLC should have existed in the first place is a separate and much bigger question, and it has its own page: why a US LLC is usually a tax trap for a Canadian resident, and the six ways out. If the LLC sits under a Canadian corporation, which is the two-related-party case above, see also what happens to a Canadian corporation when the owner moves. If the LLC came with a business purchase on an E-2, the year-one filing stack for an E-2 mover covers what else is due.

Can the penalty be removed? What reasonable cause actually requires

Reasonable cause under section 6038A does something narrower than the phrase suggests, and getting this right matters more than any other sentence on the page. It adjusts a clock. It doesn't cancel a penalty:

What you're doing, in practice, is moving the date you get measured against to the last day your reasonable cause was still good. What that's worth depends entirely on when that day was.

The showing itself is formal. Under Treas. Reg. 1.6038A-4(b)(2)(i) the corporation "must make an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement containing a declaration that it is made under penalties of perjury." IRM 20.1.9.5.5 repeats the same requirement. The determination belongs to the District Director.

The rule that reaches almost everyone reading this

The single most favourable authority on this penalty is in the regulation, and it's an instruction to the IRS rather than a right you can assert:

Two things get confused here, and they point opposite ways. There's no size exception to the filing duty: IRM 20.1.9.5.5 says flatly, "There is no small corporation exception for filing Form 5472. All corporations are subject to filing requirements of Form 5472 (if applicable)." The size rule above lives in the reasonable cause standard, which is a different rule doing a different job, and it applies to this LLC.

Separately, the record-keeping rules in section 6038A carry two exceptions for smaller reporting corporations. Both of them open by excluding an entity that's a reporting corporation because of Treas. Reg. 301.7701-2(c)(2)(vi), and that's precisely what a foreign-owned single-member LLC is, so neither one reaches it. You'll see those exceptions quoted without that carve-out, because the IRS's own manual states them without it. The carve-out is in the regulation, in a parenthetical, one clause into the sentence. (Treas. Reg. 1.6038A-1(h) and (i).)

What can count

Treas. Reg. 1.6038A-4(b)(2)(iii) says circumstances that may indicate reasonable cause and good faith "include an honest misunderstanding of fact or law that is reasonable in light of the experience and knowledge of the taxpayer." On relying on an adviser it cuts both ways in the same paragraph: reliance on professional advice "does not necessarily demonstrate reasonable cause and good faith," and it "constitutes reasonable cause and good faith if, under all the circumstances, the reliance was reasonable." An owner who asked an accountant about US filings and was told there were none is inside that sentence. Whether the reliance was reasonable is the question, and it's fact-specific.

A note on where people look for this standard. The IRS's general "penalty relief due to reasonable cause" page keys its information-return discussion to Treas. Reg. 301.6724-1, which governs the sections 6721 and 6722 penalties. That's a different regime from section 6038A, and on the adviser-reliance point it reads close to the opposite of the regulation quoted above. The 6038A test is the one in 1.6038A-4(b).

Where reasonable cause stops

It doesn't reach the continuation penalty the way a reader would expect. Because 1.6038A-4(b)(1) moves the start of the 90-day period no earlier than the last day reasonable cause existed, the manual draws the conclusion for its examiners: "Generally, if there is reasonable cause for a failure to file or maintain records, the latest date reasonable cause can exist is 90 days from the date of notification of the failure by the Service. ... As such, there is no reasonable cause exception for this penalty." (IRM 20.1.9.5.5.) That's the IRS's reading of its own rule and it isn't binding law, but it's how a case gets worked in practice, and it's another reason the notice date is the date that matters.

Does first-time abatement apply to this penalty?

No. Two independent sources say so. The IRS's administrative-waiver page publishes a closed list of penalties eligible for First Time Abate and for its successor, Automatic Exemption from Penalty: failure to file under IRC 6651(a)(1), 6698(a)(1) and 6699(a)(1), failure to pay under 6651(a)(2) and (3), and failure to deposit under 6656. Section 6038A isn't on it, and the same page excludes "Returns filed once or infrequently (i.e., event-based filing requirements)." (irs.gov. FTA is transitioning to AEP from summer 2026 with the same eligible-penalty list.) And the manual says it about this form by name: "The first time abatement (FTA) penalty relief provisions do not apply to event-based filing requirements such as with Form 5472."

That isn't the end of the paragraph, though, and the rest of it matters to anyone filing several late years at once. The same IRM subsection documents a route by which an abatement on a different penalty can carry this one with it:

Read the verb. It's "may be abated." This is internal guidance to IRS staff and it creates no right you can insist on. It reaches only a penalty that was systemically assessed with PRN 711, which happens when the Form 5472 arrives attached to a late-filed Form 1120, and that's exactly the shape of a catch-up covering several years at once. It doesn't reach a penalty an examiner asserted under PRN 625. Both of the extra conditions have to be met.

The paragraph before it does the same thing for reasonable cause: where the Form 1120 failure to file penalty is abated using a penalty reason code other than PRC 018, and there were no similar penalties in the three prior periods, the PRN 711 penalty may be abated using that same code. And the subsection closes by saying that where neither of those applies, "penalty relief is still available when reasonable cause can be demonstrated."

So "first-time abatement doesn't apply" is true, and reading it as "no administrative relief exists" would be wrong.

Is it better to file the late Form 5472 now, or wait?

That turns on something only you know, so here are both branches and the condition that separates them, and then we'll stop.

The IRS publishes a route for late international information returns. It applies to taxpayers "who are not under a civil examination or a criminal investigation by the IRS and have not already been contacted by the IRS about the delinquent information returns," and it says such taxpayers "should file the delinquent information returns through normal filing procedures." (Delinquent international information return submission procedures, last updated April 19, 2026.)

The same page is blunt about what that route isn't. "Penalties may be assessed in accordance with existing procedures." And on the statement people assume protects them: taxpayers may attach a reasonable cause statement to each delinquent return, but "During the processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence from the IRS and submit or resubmit reasonable cause information." Filing under this route is not a penalty-free filing.

We're not going to tell you to file and we're not going to tell you to wait. The condition the published procedure turns on, whether the IRS has already made contact about these returns, is a fact about your own file, and it's the first thing worth establishing.