If you are a domestic U.S. Corporation who does business with a foreign affiliate you may be subject to having to file form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business" as part of your 1120. The form discloses the nature of the related parties as well as the transactions that have taken place between the two. Here in Miami, we have a substantial number of small businesses that conduct international trade and care should be taken to assure yourself of the required compliance. The form should be attached to your tax return when filed and the form by itself also needs to be mailed to the IRS separately. A hefty penalty of $10,000 may be imposed for failure to file the form as required. In addition, if the form is filed but is substantially inaccurate it may be deemed the same as failure to file.
A key part of making sure clients are in compliance is to have a good relationship with your tax preparer and advisor. This type of tax matter is one that can easily be overlooked by both the tax preparer and the client company. Firstly, the transactions and relationships are unknown, and not self evident to the tax advisor or preparer. Secondly, the client does not know enough to volunteer the information. This is the perfect example why good tax preparation takes time, skill and knowledge. It's safe to say, and I think you will agree, that relationship is worth $10,000.
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