IRC Section 6038A: The Law Behind the $25,000 Form 5472 Penalty

Internal Revenue Code section 6038Ais titled “Information with respect to certain foreign-owned corporations.” It was enacted by the Tax Reform Act of 1986 and substantially strengthened by the Omnibus Budget Reconciliation Act of 1989, which added the record-keeping and agency teeth that make it powerful today. The statute exists to give the IRS visibility into transactions between US entities and the foreign parties that control them.

Section 6038A creates three distinct obligations for a reporting corporation: a reportingduty (file Form 5472), a record-keeping duty (maintain books substantiating each reportable transaction), and an agency duty (authorize the US entity to act as the foreign owner's agent for IRS summonses). Form 5472 is the visible output, but the statute is broader than the form.

For a plain-language overview of the form itself, see what is Form 5472; this page covers the legal authority beneath it — the citations a CPA or attorney relies on.

The statute applies to a reporting corporation, defined in §6038A(a) and the regulations. The category is broader than “corporation” in ordinary usage because the 2017 regulations folded disregarded entities into it.

A 25% foreign shareholder is any foreign person owning at least 25% of the entity by vote or value, directly or through attribution. For the typical non-resident-owned single-member LLC, the single owner holds 100%, so the 25% threshold is easily met.

The famous $25,000 figure comes directly from §6038A(d). The subsection imposes the penalty for two distinct failures: failing to furnish information (file Form 5472) and failing to maintain records. Each failure, for each tax year, is a separate $25,000 penalty.

The original penalty was $10,000 and was increased to $25,000 by the Protecting Americans from Tax Hikes (PATH) Act of 2015, effective for tax years beginning after December 31, 2015. The continuation penalty under §6038A(d)(2) is what makes inaction so dangerous: once a 90-day notice goes unanswered, the liability grows by $25,000 every 30 days with no ceiling.

For its first three decades, §6038A reached only actual corporations. A foreign-owned single-member LLC — being disregarded — fell outside it. The Treasury closed that gap with Treasury Decision 9796, finalized in December 2016 and effective for tax years beginning on or after January 1, 2017.

T.D. 9796 added Treas. Reg. §1.6038A-1(c)(1), which treats a domestic disregarded entity that is wholly owned by a foreign person as a separate domestic corporationfor the limited purposes of §6038A's reporting and record-keeping rules. The entity remains disregarded for income tax; it is “regarded” only to require Form 5472. This is the legal hook for the entire non-resident-LLC compliance regime, explained practically in the foreign-owned disregarded entity guide.

The reason a missed Form 5472 never becomes “safe” lies in a different statute: IRC §6501(c)(8). Ordinarily, the IRS has three years to assess tax (six in some cases). But §6501(c)(8) provides that when required information under provisions including §6038A is not furnished, the limitations period does not begin to run — and can stay open for the entire return — until the information is filed.

The practical takeaway is the same one the missed Form 5472 guide stresses: because the clock does not run while the form is unfiled, the only way to start it — and to limit exposure — is to file the delinquent return.

Reporting is only half of §6038A. Subsection (a) imposes a parallel record-keepingobligation: a reporting corporation must maintain records sufficient to establish the correctness of its federal income tax return, including the amount and nature of each reportable transaction with a related party. The regulations at Treas. Reg. §1.6038A-3 detail the scope.

For a small foreign-owned LLC, satisfying this duty is straightforward in principle: keep bank statements, the operating agreement, loan agreements, invoices, and a ledger of money moving between the owner and the entity. The danger is that a separate $25,000 penalty under §6038A(d) applies to a failure to keep these records — independent of, and in addition to, any penalty for not filing the form.

The third pillar of §6038A is the agency rule in subsection (e). It allows the IRS to require that the foreign related party authorize the US reporting corporation to act as its agent for purposes of IRS summonses seeking records about reportable transactions. The authorization is typically documented on a power of attorney or a written authorization of agent.

The consequence of non-cooperation is severe and distinctive: under §6038A(e), if the foreign party does not authorize the entity as agent, or the entity does not produce summoned records, the IRS may determine the amount of the related-party items in its sole discretion from its own information — a so-called noncompliance penalty that can disallow deductions or recharacterize amounts. This is why the agency and record-keeping rules matter even though Form 5472 itself computes no tax.

IRC §6038C is the companion statute to §6038A. Where §6038A covers 25%-foreign-owned US corporations (and disregarded entities), §6038C extends essentially the same reporting, record-keeping, and agency requirements to foreign corporations engaged in a US trade or business. Both statutes are satisfied through the same form: Form 5472.

For the typical non-resident founder with a US LLC, §6038Ais the operative provision. §6038C becomes relevant only if a foreign corporation is itself operating in the United States. The official title of Form 5472 — “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” — names both statutes directly.