Form 5471 and 5472 Penalties: Abatement Paths After the Tax Court Rulings

The IRS assesses a $10,000 penalty per year for each late or missing Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) and a $25,000 penalty per year for each late or missing Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation). These are not proportional to income, not proportional to tax owed, and not capped at any reasonable relationship to the underlying transaction. A US person who owns a small Canadian consulting corporation and misses three years of Form 5471 owes $30,000 in penalties before anyone looks at whether any tax was owed. The penalties are designed for large multinationals hiding offshore income, but they land equally on dual citizens running a one-person Canadian company. This page covers the penalty mechanics, the Tax Court decisions that changed the landscape, and the abatement paths that actually work.

What triggers the Form 5471 penalty?

IRC 6038(a) requires US persons to file Form 5471 for each “controlled foreign corporation” (CFC) in which they are a US shareholder (generally 10% or more ownership). For most Canadian-corporation owners who are US citizens, green card holders, or US residents, their Canadian corporation is a CFC and they are required to file Form 5471 annually with their US return.

The penalty for failure to file is $10,000 per form per year, assessed automatically when the IRS determines the form was not filed (IRC 6038(b)(1)). If the taxpayer does not file within 90 days of the IRS’s notice, an additional $10,000 per month applies (up to $50,000 maximum per form per year). The IRS can also reduce the taxpayer’s foreign tax credits by 10% for each annual period the failure continues.

The penalty applies regardless of whether any tax was owed, regardless of whether the taxpayer reported the income from the corporation on their US return, and regardless of the size of the corporation. A Canadian corporation with $40,000 in annual revenue can generate a $10,000 US penalty for a missing information return.

For a full overview of who needs to file, see do I file Form 5471 for my Canadian corporation.

What triggers the Form 5472 penalty?

IRC 6038A requires a “reporting corporation” (a US corporation that is 25% or more foreign-owned) to file Form 5472 for each “reportable transaction” with a related foreign party. The penalty for failure is $25,000 per form per year (IRC 6038A(d)(1)), with additional penalties of $25,000 per month after a 90-day notice period.

Form 5472 also applies to foreign-owned US disregarded entities. After the 2016 regulations, a US single-member LLC owned by a Canadian resident is treated as a reporting corporation for Form 5472 purposes, even though it is disregarded for income tax purposes. This catches a large number of Canadian residents who formed a US LLC for business or investment purposes and did not know about the reporting requirement.

The $25,000 penalty for a disregarded entity that had minimal or no transactions is particularly harsh. A Canadian who formed a US LLC to hold a small investment and forgot to file Form 5472 for three years faces $75,000 in penalties.

What did the Farhy decision change?

In Farhy v. Commissioner, 160 T.C. 6 (2023), the Tax Court held that the IRS does not have the authority to assess and collect Form 5471 penalties under IRC 6038(b) through its normal assessment procedures. The court reasoned that section 6038(b) does not include language that would bring the penalties within the IRS’s assessment authority under IRC 6201. Instead, the IRS would need to bring a civil action in federal district court to collect the penalties, which is more expensive and time-consuming for the government.

The DC Circuit Court of Appeals reversed Farhy in June 2024 (Farhy v. Commissioner, No. 23-1179), holding that the IRS does have assessment authority. The appellate court found that the penalty under section 6038(b) is an “assessable penalty” that falls within the IRS’s general assessment power. This reversal means the IRS can continue assessing these penalties through its normal administrative process.

However, the Farhy litigation (both the Tax Court win and the appellate reversal) made the IRS more cautious about these penalties. The IRS paused automated assessments of section 6038 penalties during the litigation and has been more receptive to reasonable cause abatement requests. The legal argument that the IRS lacks assessment authority no longer holds at the circuit level, but the practical effect of the litigation was to put the IRS on notice that these penalties are contested.

For Form 5472 penalties, the assessment authority question is different: section 6038A(d) has separate penalty provisions, and the Farhy analysis does not directly apply. The reasonable cause defense, however, is the same.

How do I get the penalty abated?

Two main paths: reasonable cause and first-time abatement. First-time abatement is simpler but only covers the failure-to-file component; reasonable cause is the primary defense for information return penalties.

Reasonable cause under IRC 6038(c)(4)(B) (for 5471) and IRC 6038A(d)(3) (for 5472) is a complete defense. The taxpayer must show that the failure was due to reasonable cause and not willful neglect. The IRS evaluates both the reason for the failure and the taxpayer’s conduct after discovering the obligation.

For Canadian-corporation owners, the strongest reasonable cause arguments are:

Reliance on a professional. If your Canadian accountant handled your tax affairs and did not advise you about US filing obligations, reliance on that professional is reasonable cause. The reliance must be on a competent professional, you must have provided the professional with all relevant information, and the reliance must be in good faith. Document the relationship: when you engaged the accountant, what you asked them to do, whether you disclosed your US status, and whether they mentioned US filing obligations.

Ignorance of the filing requirement. This is weaker than professional reliance but can work, especially for accidental Americans (people who are US citizens by birth but have lived their entire lives in Canada) and for new green card holders who were not briefed on international reporting obligations. The IRS is more receptive to this argument when the taxpayer filed the missing forms promptly upon discovering the obligation.

Compliance history. If you filed all other required US returns on time, reported the income from the corporation on your US return (through Subpart F, GILTI, or other CFC provisions), and paid any tax due, the penalty is disproportionate to the offense. This is not a standalone argument, but it strengthens the reasonable cause narrative.

Small corporation with no US tax consequence. If the Canadian corporation is small, the income was already reported on the US return, and no US tax was avoided by the failure to file Form 5471, the penalty is punitive rather than compensatory. The IRS’s internal guidance (IRM 20.1.9) instructs examiners to consider the tax consequence of the failure when evaluating reasonable cause.

What should I include in the abatement request?

A reasonable cause letter for information return penalties should cover:

1. What happened. Identify each form, each year, and the penalty amount. Reference the notice number.
2. Why it happened. Explain the specific reason for the failure: reliance on a professional, ignorance of the requirement, or other circumstances. Be specific and document the claim (attach the engagement letter with the Canadian accountant, the correspondence showing you disclosed your US status, etc.).
3. What you did about it. Explain when you discovered the obligation, how you discovered it, and what steps you took to come into compliance (filed the missing forms, engaged a US tax professional, filed through streamlined).
4. Why the penalty is disproportionate. If the corporation was small and no US tax was avoided, state that. If the income was already reported on the US return, state that.
5. The ask. Request full abatement of all penalties under the reasonable cause provisions of section 6038(c)(4)(B) or 6038A(d)(3).

Mail the request to the address on the penalty notice. If the penalty was assessed as part of a streamlined filing, the IRS may process the abatement request concurrently with the streamlined submission.

What if the IRS denies the abatement?

Request a conference with IRS Appeals within 30 days of the denial. Appeals officers have broader authority to consider the hazards of litigation and can abate penalties that the original examiner would not. If Appeals also denies, you can pay the penalty and file a refund claim, then sue in federal district court or the Court of Federal Claims if the claim is denied.

For penalties assessed on forms filed through the streamlined procedure, the IRS’s denial of abatement does not affect the streamlined zero-penalty treatment on the underlying tax. The information return penalty is separate from the streamlined penalty waiver.

How does this interact with Subpart F and GILTI?

If you owe Form 5471 penalties, you likely also have Subpart F and GILTI obligations. The penalty for the missing Form 5471 is separate from any tax owed on the CFC’s income. Abating the penalty does not eliminate the Subpart F or GILTI inclusion, and paying the Subpart F or GILTI tax does not automatically abate the penalty.

However, if you already reported the CFC income on your US return (through the streamlined procedure or otherwise) and paid the tax, this strengthens the reasonable cause argument. The purpose of Form 5471 is to provide the IRS with information about the CFC. If the IRS already has the information (because you reported the income), the penalty for not providing it on the specific form is less justified.

What should I do next?

If you have received a penalty notice for Form 5471 or 5472, do not pay it without first requesting abatement. Write a detailed reasonable cause letter with supporting documentation. If the penalty was assessed as part of a larger filing (streamlined, VDP, or delinquent returns), coordinate the abatement request with the overall filing strategy.

If you have not yet filed the missing forms, do so before requesting abatement. Coming into compliance before the request shows good faith. If you are coming into compliance through the streamlined procedures, file the forms as part of the streamlined package and include the reasonable cause letter with the submission.

For IRS penalty abatement generally (including failure-to-file and failure-to-pay penalties that may accompany the information return penalties), the first-time abatement and reasonable cause paths apply independently.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.