IRC Section 6038A: The Law Behind the $25,000 Penalty

Internal Revenue Code section 6038A sits in the part of the Code dealing with foreign-related information reporting. Congress enacted it in 1982 and strengthened it in 1989 because foreign owners of US companies could move profits offshore through related-party pricing that the IRS could not see. The statute attacks that blind spot in two ways: it imposes a record-keeping duty and an annual reporting duty. The reporting duty is satisfied by filing Form 5472.

Critically, Section 6038A is not a tax-payment rule — it imposes no tax of its own. It is a transparency mandate backed by a punishing penalty. The deeper legal reference page for this is IRC Section 6038A and Form 5472, and the penalty mechanics are detailed on the Form 5472 penalty page.

The statute defines a "reporting corporation" as a domestic corporation that is 25-percent foreign-owned during the tax year. A corporation is 25-percent foreign-owned if at least one direct or indirect 25% foreign shareholder exists at any time during the year. The reach widened dramatically in 2017, as the table below shows.

If you are unsure whether you cross the 25% line, the statute reference page walks through the attribution rules in detail.

Before 2017, a foreign-owned single-member LLC was completely invisible to the IRS: it filed nothing, paid nothing, and reported nothing. Treasury closed that loophole with T.D. 9796, which amended the regulations so that a foreign-owned domestic disregarded entity is treated as a corporation for the limited purpose of Section 6038A reporting and record-keeping.

The practical effect: the LLC must obtain an EIN, file Form 5472 attached to a pro forma Form 1120, and keep records — even though it still has no entity-level income tax. The 2026 mechanics of that filing are covered in Form 5472 instructions 2026.

Many filers focus only on the form and forget that Section 6038A has two independent duties. Subsection (a) demands records that let the IRS verify each related-party transaction — invoices, ledgers, contracts, and proof of amounts contributed or distributed. The regulations under Treas. Reg. §1.6038A-3 describe "safe-harbor" categories of records a reporting corporation should retain.

Keep your bank statements and funding records for every year — they are your defense if the IRS ever asks. The full penalty exposure is laid out on the Form 5472 penalty page.

This is one of the harshest information-return penalties in the entire Code. The base penalty is a flat $25,000, not a percentage — it does not matter that a disregarded entity owes no income tax. The penalty is assessed per form, per year, per entity, so a filer three years behind on one LLC already faces $75,000 before any continuation penalty is added.

The penalty can sometimes be challenged for reasonable cause, but that requires credentialed representation we do not provide. We focus on getting you filed correctly and on time. See the penalty page for the reasonable-cause standard.

Most tax issues have a three-year limitations window. Section 6038A defeats that through a cross-reference in IRC §6501(c)(8): when a required international information return such as Form 5472 is not filed, the statute of limitations for the whole tax return does not even begin to run. The clock starts only when you finally file the missing information.

This is why old, unfiled years remain dangerous and why catch-up filing is worthwhile even for entities that have been silent for years. The 2026 legislative backdrop affecting foreign owners is covered in the One Big Beautiful Bill Act 2026 explainer.

There is no electronic path for a foreign-owned disregarded entity. The package must be mailed to P.O. Box 149342, Austin, TX 78714-9342 or faxed to 855-887-7737 — only those two methods. The deadline is April 15 for a calendar-year LLC, extended to October 15 if Form 7004 is filed on time. Keep your certified-mail receipt or fax confirmation as proof of timely filing.

One important clarification: BOI reporting is separate from Section 6038A. Under FinCEN's March 2025 interim final rule, US-formed entities — including foreign-owned US LLCs — are exempt from BOI reporting; only foreign reporting companies file. Form 5472 is unaffected and still required. For pricing, see the pricing page, or begin on the apply page.