Section 6038A

Section 6038A of the Internal Revenue Code is the legal engine behind Form 5472. It requires a US corporation that is 25% foreign-owned, and since 2017 a foreign-owned disregarded entity treated as a corporation for this purpose, to report its transactions with foreign related parties each year and to keep records that back those numbers up. When people talk about the Form 5472 requirement, section 6038A is the statute they mean.

The section is best known for its penalty. Failing to file Form 5472 on time, or filing one that is substantially incomplete, costs $25,000 per form, per year. There is no cap tied to company size and no reduction for a company that earned nothing. A dormant LLC in its first year faces the same $25,000 exposure as a business with millions in revenue.

The penalty also grows. If the IRS notifies you of the failure and you still have not filed 90 days later, section 6038A adds another $25,000 for each 30-day period that follows. A founder who ignores the notice for six months after that 90-day mark can watch a single missed form grow past $150,000. This continuation penalty is why responding to IRS mail quickly matters more than almost anything else in this area.

Two more duties hide in the statute. Companies must maintain records sufficient to show their related-party dealings, and the same $25,000 penalty applies to a recordkeeping failure. The escape route is reasonable cause: showing you acted with ordinary care and fixed the problem promptly. First-time abatement, the automatic relief that works for many common penalties, generally does not apply to section 6038A penalties, so the reasonable cause statement is usually the only realistic path. Multi-member LLCs file Form 1065 instead and face their own late-filing penalty of $255 per partner per month.