Appealing a Form 5472 Penalty After the IRS Denies Reasonable Cause

A $25,000 Form 5472 penalty is not necessarily final because the IRS has denied a taxpayer’s reasonable-cause request. The next step, however, should not be an automatic appeal. Counsel first should determine how the penalty was assessed, what administrative relief remains available, what evidence is missing from the record, and whether an offered Appeals conference could affect later Collection Due Process rights.

For smaller foreign-owned businesses, three issues deserve particular attention: the special small-corporation reasonable-cause rule in Treas. Reg. §1.6038A-4(b)(2)(ii), a narrow first-time-abatement pathway for certain systemically assessed penalties, and the procedural consequences of choosing among Appeals, Collection Due Process, and refund litigation.

The Form 5472 Penalty

For purposes of §6038A, Form 5472 generally applies to a U.S. corporation that is at least 25 percent foreign-owned and has reportable transactions with a related party. The rules also reach certain foreign-owned U.S. disregarded entities. For §6038A purposes, a foreign-owned U.S. disregarded entity is treated as a domestic corporation and generally must file a pro forma Form 1120 with Form 5472 attached even though it may remain disregarded for other federal income-tax purposes.

Under §6038A(d)(1) and Treas. Reg. §1.6038A-4(a)(1), a reporting corporation is subject to a $25,000 penalty for each taxable year with respect to which a covered failure occurs for taxable years beginning after December 31, 2017. For earlier taxable years, the amount was $10,000. Treas. Reg. §1.6038A-4(a)(3) generally limits the initial monetary penalty, before continuation penalties, to one penalty per taxable year with respect to each related party for the covered failures. Filing a substantially incomplete Form 5472 can constitute a failure to file.

If a covered failure continues for more than 90 days after the IRS mails the required notice, Treas. Reg. §1.6038A-4(d)(1) provides for an additional $25,000 with respect to each related party for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period. The statute does not impose a fixed dollar cap.

The first task is therefore to identify the assessment precisely: the taxable period, whether the assessment is an initial or continuation penalty, whether it was generated systemically or through examination, the penalty reference number, and whether the taxpayer was actually subject to the reporting requirement.

Running Example: A Foreign-Owned Single-Member LLC

Assume a foreign individual owns a U.S. single-member LLC that is disregarded for federal income-tax purposes. The LLC has reportable transactions with its owner but does not timely file the required pro forma Form 1120 and Form 5472. When the delinquent filing is processed, the IRS systemically assesses a $25,000 PRN 711 penalty.

Before appealing, counsel should determine whether the related Form 1120 satisfies the FTA conditions, whether the small-corporation rule applies, whether every required Form 5472 has been filed, whether a continuation penalty has been asserted, and what effect the offered Appeals process may have on later CDP review.

Reasonable Cause Under §6038A

Section 6038A contains its own reasonable-cause provision. Section 6038A(d)(3) treats the prescribed compliance date, and the beginning of the 90-day continuation-penalty period, as no earlier than the last day on which reasonable cause existed, as shown to the IRS’s satisfaction.

Treas. Reg. §1.6038A-4(b) requires the taxpayer affirmatively to establish good faith and reasonable cause. The submission must state the relevant facts in writing and contain a declaration under penalties of perjury. The regulation identifies circumstances relevant to the facts-and-circumstances inquiry, including an honest misunderstanding of fact or law that was reasonable in light of the taxpayer’s experience and knowledge. It also states that isolated computational or transcriptional errors generally are not inconsistent with reasonable cause and good faith, and that reasonable reliance on professional advice or information can support reasonable cause when the reliance was reasonable under all the circumstances.

Professional reliance is not automatic reasonable cause. A persuasive submission should identify who was retained, what information the taxpayer supplied, what the adviser was asked to do, what advice was given, what the taxpayer understood, and why the taxpayer reasonably believed its federal filing obligations had been satisfied.

What an IRS Denial Does Not Establish

A denial of reasonable-cause relief does not itself establish that the taxpayer lacked reasonable cause or that the penalty was correctly assessed. Form 5472 penalties may be generated systemically or through examination, and the applicable administrative procedures differ.

The denial should be tested against the actual record. Did the IRS address the evidence? Was the required declaration under penalties of perjury included? Did the IRS apply Treas. Reg. §1.6038A-4 and the small-corporation rule where relevant? Were the operative dates established? Was every required Form 5472 ultimately filed? A second letter that simply repeats the first request does little. The appeal should correct the record.

Before Requesting Appeals, Consider the CDP Consequences

A Form 5472 penalty dispute can intersect with Collection Due Process (CDP) rights. Under §6330(c)(2)(B), a taxpayer generally may challenge the existence or amount of an underlying liability in a CDP hearing only if the taxpayer did not receive a statutory notice of deficiency and did not otherwise have an opportunity to dispute the liability.

Treas. Reg. §301.6330-1(e)(3), Q&A-E2 provides that a conference with Appeals offered either before or after assessment can constitute a prior opportunity. Lewis v. Commissioner, 128 T.C. 48 (2007), upheld the regulation where the taxpayer actually participated in a prior Appeals conference. Iames v. Commissioner, 850 F.3d 160 (4th Cir. 2017), likewise held that a meaningful preassessment Appeals opportunity barred a later liability challenge in CDP. The regulation’s examples also treat an offered but declined Appeals conference as a prior opportunity. Counsel therefore should not assume that declining Appeals preserves a later merits challenge in CDP.

The sequencing issue should therefore be analyzed when the denial letter arrives, not after collection begins. For the foreign-owned single-member LLC in the example above, if the offered post-assessment Appeals conference constitutes a prior opportunity under Q&A-E2, the LLC generally cannot later challenge the underlying penalty liability in CDP. Even when the underlying liability cannot be challenged, CDP can remain available for appropriate collection issues and collection alternatives.

A Narrow First-Time-Abatement Route for Certain PRN 711 Penalties

First-time abatement (FTA) generally does not apply directly to event-based filing requirements such as Form 5472. The Internal Revenue Manual, however, provides special procedures for a systemically assessed initial Form 5472 penalty carrying penalty reference number 711 (PRN 711) when the penalty arose because Form 5472 was attached to a late-filed Form 1120.

IRM 20.1.9.5.5(3)(A) separately addresses reasonable-cause relief for a systemically assessed PRN 711 penalty. If the related Form 1120 failure-to-file penalty is abated for reasonable cause using a penalty reason code other than PRC 018, and the taxpayer had no similar PRN 625 or PRN 711 penalties in the three prior periods, the PRN 711 penalty may be abated using the same penalty reason code.

Under IRM 20.1.9.5.5(3)(B), FTA itself does not directly apply to event-based filing requirements such as Form 5472. But if the failure-to-file penalty on the related Form 1120 is abated under FTA using PRC 018, or would have been eligible for FTA but no failure-to-file penalty was assessed because there was $0 tax due or it was a fully paid return, the PRN 711 penalty may also be abated with PRC 018 if (1) the taxpayer had no similar PRN 625 or PRN 711 penalties in the three prior periods and (2) the related Form 1120 was not filed late in those periods.

This special procedure is limited to systemically assessed PRN 711 penalties. IRM 21.8.2.21.2(1) confirms that, beginning in 2013, Master File systemically assesses §6038A initial penalties when Form 5472 is attached to a late-filed Form 1120-series return, using PRN 711 and generating a CP 215 notice. Examiner-assessed penalties are handled separately and fall outside this PRN 711 procedure.

The IRS is phasing out FTA and replacing it with Automatic Exemption from Penalty (AEP). IRS guidance states that AEP will replace FTA for eligible returns with original due dates on or after January 1, 2027. AEP applies to specified failure-to-file, failure-to-pay, and failure-to-deposit penalties on eligible return series. It does not itself provide relief from a §6038A(d) Form 5472 penalty, and IRS guidance excludes event-based filing requirements and information reporting dependent on another filing. Because IRM 20.1.9.5.5(3)(B) is currently keyed to the related Form 1120’s qualification for FTA, the treatment of this special PRN 711 pathway after the transition is not yet clear.

The Special Rule for Small Corporations

Treas. Reg. §1.6038A-4(b)(2)(ii) directs the IRS to apply reasonable cause liberally when a small corporation meets four requirements:

1. Gross receipts for the taxable year do not exceed $20 million.
2. The corporation had no knowledge of the §6038A requirements.
3. The corporation had limited presence in and contact with the United States.
4. The corporation promptly and fully complied with IRS requests to file Form 5472 and provide relevant books and records.

Chief Counsel Advice 202617012, dated December 17, 2024 and released April 24, 2026, provides useful insight into Chief Counsel’s interpretation of this provision. Under §6110(k)(3), however, the CCA may not be used or cited as precedent.

Chief Counsel interprets the $20 million threshold as referring to the corporation’s overall gross receipts, not merely its U.S. gross receipts. The CCA notes, however, that Treas. Reg. §1.6038A-4 does not specify how gross receipts are calculated for this purpose.

Chief Counsel explained that satisfying the small-corporation requirements makes reasonable cause easier to establish. Where the taxpayer makes a sufficient factual showing through a written submission supported by factual representations or evidence, the IRS ordinarily would be justified in finding reasonable-cause relief appropriate. The CCA also emphasizes that liberal application does not eliminate the Form 5472 filing obligation or reduce the level of compliance ultimately required.

Requesting Review by the Independent Office of Appeals

After considering the CDP consequences, a taxpayer that elects to pursue administrative review should follow the procedure and deadline stated in the IRS denial letter. The applicable procedure can depend on how the penalty arose and how much is disputed. A single $25,000 penalty may fall within the dollar threshold used for a Small Case Request in some examination settings, but the taxpayer should follow the instructions in the particular notice rather than assume that a generic procedure applies.

For the LLC in the example, the Appeals submission should identify the PRN 711 assessment, address the FTA requirements separately from reasonable cause, and explain why the small-corporation rule applies if the facts support it. That approach gives Appeals distinct grounds on which to resolve the case.

Build the Appeals Protest as the Administrative Record

A persuasive protest should do four things.

1. Verify liability. Confirm that the taxpayer was a reporting corporation, that a reportable transaction existed, that the correct taxable period and related parties were identified, and that the assessment amount corresponds to §6038A(d).
2. Reconstruct the chronology. Establish formation, ownership, related-party transactions, engagement of tax advisers, return preparation, discovery of the Form 5472 requirement, corrective filings, IRS correspondence, and remedial procedures.
3. Connect the evidence to the governing standard. Each significant document should support a factual proposition relevant to liability, reasonable cause, good faith, the small-corporation rule, FTA eligibility, or prompt corrective action.
4. Address weaknesses directly. Explain adverse facts, inconsistencies, prior filing history, or delays rather than leaving Appeals to infer the explanation.

The representative also should be prepared to explain what happened, why the taxpayer did not understand that Form 5472 was required, what professional advice was obtained, when the problem was discovered, how quickly it was corrected, and what procedures now prevent recurrence. These points need not occupy a separate conference memorandum if the protest already develops them fully.

Check the IRS File and §6751(b)

For a qualifying taxpayer, §7803(e)(7) provides access to the nonprivileged portions of the IRS case file relating to the disputed issues before a scheduled Appeals conference, generally not later than 10 days before the conference unless the taxpayer elects to expedite it. For an entity, a specified taxpayer generally includes one with gross receipts not exceeding $5 million for the taxable year at issue, and aggregation rules similar to §448(c)(2) apply. Obtaining the file can reveal what the IRS relied upon, what facts were developed, and what assumptions should be corrected before the conference.

Counsel also should determine whether §6751(b) required written supervisory approval of the penalty determination. The current final regulations, Treas. Reg. §301.6751(b)-1, apply to penalties assessed on or after December 23, 2024. They except penalties automatically calculated through electronic means, defined as penalties for which an IRS computer program automatically generates a notice proposing the penalty. If the taxpayer challenges that proposed penalty before assessment and an IRS employee considers the response, the penalty is no longer treated as automatically calculated. Counsel therefore should not assume that every systemically assessed Form 5472 penalty falls within the exception; the actual assessment process matters.

Appeals Is Independent and May Weigh Litigation Hazards

The Independent Office of Appeals is organizationally separate from the IRS function that handled the penalty dispute. Its procedures direct Appeals to evaluate the applicable law and facts and permit consideration of hazards of litigation after other bases for penalty relief are analyzed.

A developed presentation can therefore address several separate grounds: incorrect liability, reasonable cause under §6038A and Treas. Reg. §1.6038A-4, liberal application of reasonable cause under the small-corporation provision, FTA for an eligible PRN 711 assessment, procedural defects, and litigation hazards. Current IRS procedures contemplate full sustainment, full abatement, or partial abatement of international penalties.

Appeals can consider new information, but substantial factual development may cause the matter to be returned to the originating IRS function. The investigation should therefore be completed before the conference whenever practicable.

The Assessability Argument Is Now a Secondary Issue

In Farhy v. Commissioner, 160 T.C. 399 (2023), the Tax Court held that §6038(b) penalties were not administratively assessable. The D.C. Circuit reversed. Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024). The Tax Court later adhered to its position in Mukhi v. Commissioner, 163 T.C. 150 (2024). In 2026, the Second Circuit joined the D.C. Circuit and held §6038(b) penalties assessable. Safdieh v. Commissioner, 169 F.4th 102 (2d Cir. 2026).

Those cases concern §6038(b), principally Form 5471 penalties, not the separate §6038A(d) penalty for Form 5472 failures. No reported decision appears to have squarely decided whether §6038A(d) penalties are administratively assessable. Treas. Reg. §1.6038A-4(a)(1), however, expressly states that the monetary penalty “shall be assessed.” That regulatory language does not itself resolve whether Congress supplied statutory assessment authority, but it makes the analogy to §6038(b) less direct. With two circuits now rejecting the Tax Court’s non-assessability analysis under §6038(b), a Farhy-type argument is materially weaker by analogy to §6038A than it appeared after the Tax Court’s original Farhy decision. In an appropriate Form 5472 case, it is better treated as an issue to preserve or a potential litigation hazard than as the principal defense to the penalty.

If Appeals Does Not Resolve the Case

The IRS treats §6038A(d) penalties as assessable penalties that do not proceed through the ordinary notice-of-deficiency process. If prepayment review of the underlying liability is unavailable through CDP, refund litigation may become the principal judicial route.

A refund case ordinarily requires payment followed by a timely administrative refund claim, commonly on Form 843. Under §7422(a), a refund suit generally may not be maintained until a claim has been filed. Treas. Reg. §301.6402-2(b)(1) requires the claim to set forth in detail each ground on which a refund is claimed and facts sufficient to apprise the Commissioner of the exact basis, verified by a declaration under penalties of perjury. After the IRS disallows the claim, or after six months have passed without action, the taxpayer may be able to sue in the appropriate U.S. District Court or the U.S. Court of Federal Claims, subject to the jurisdictional and limitations rules.

Under §6532(a), the two-year period for filing a refund suit generally begins when the IRS mails a formal notice of claim disallowance by certified or registered mail. Not every letter denying penalty relief starts that period. IRS procedures state that Letter 854C penalty-abatement disallowance letters ordinarily are not sent by certified or registered mail and therefore do not themselves begin the §6532(a) period.

Refund jurisdiction also implicates the full-payment rule of Flora v. United States, 362 U.S. 145 (1960). Whether a §6038A penalty or continuation increment is divisible for refund-jurisdiction purposes has not been definitively established. A taxpayer should not assume that payment of one increment or one year’s penalty is sufficient without analyzing the governing law.

For the foreign-owned LLC in the example, if administrative relief fails and the underlying liability cannot be reviewed through CDP, the next decision may be whether to pay the required amount, file a comprehensive refund claim, and pursue refund litigation.

Interest and Continuation Penalties Require Separate Attention

Under §6601(e)(2)(A), interest on an assessable penalty is not imposed if the penalty is paid within 21 calendar days after notice and demand, or within 10 business days when the amount shown on the notice and demand equals or exceeds $100,000. If the amount remains unpaid beyond that period, interest runs from the notice-and-demand date. If the penalty is later reduced or removed, the IRS states that it will automatically reduce or remove the related interest.

Continuation penalties also should be reviewed independently. Reasonable cause can affect when the 90-day continuation-penalty period begins. Once the applicable 90-day period expires, however, IRM 20.1.9.5.5(2) states that there is no separate reasonable-cause exception to the continuation penalty. Counsel should confirm that the IRS mailed the notice required to start the 90-day period, identify the last day on which reasonable cause existed for purposes of §6038A(d)(3), and determine whether the IRS correctly calculated each additional 30-day period and each related party for which the penalty was asserted.

Conclusion

After the IRS denies reasonable-cause relief, a Form 5472 case becomes a procedural as well as a substantive tax controversy. The taxpayer should identify every available ground for relief, build the evidentiary record, and choose the next forum with an understanding of how that choice may affect later review. For qualifying small corporations and systemically assessed PRN 711 cases, the regulations and IRS procedures provide relief provisions that should be addressed expressly rather than buried in a generalized plea for leniency.

Selected Authorities and Sources

• 26 U.S.C. §6038A
• Treas. Reg. §1.6038A-4, Monetary Penalty
• IRS, Instructions for Form 5472
• IRM 20.1.9.5.5, Reasonable Cause
• IRM 21.8.2.21.2, Form 5472 Penalties Systemically Assessed from Late-Filed Form 1120 Series
• IRS, Administrative Penalty Relief and Automatic Exemption from Penalty
• IRS, IR-2026-83, IRS Simplifies Penalty Relief, Introduces Automatic Process for Eligible Taxpayers (July 8, 2026)
• IRS Chief Counsel Advice 202617012 (released Apr. 24, 2026)
• 26 U.S.C. §6110(k)(3)
• 26 U.S.C. §6330(c)(2)(B)
• Treas. Reg. §301.6330-1, Collection Due Process
• Lewis v. Commissioner, 128 T.C. 48 (2007)
• Iames v. Commissioner, 850 F.3d 160 (4th Cir. 2017)
• Farhy v. Commissioner, 160 T.C. 399 (2023)
• Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024)
• Mukhi v. Commissioner, 163 T.C. 150 (2024)
• Safdieh v. Commissioner, 169 F.4th 102 (2d Cir. 2026)
• 26 U.S.C. §7803(e)(7)
• 26 U.S.C. §6751
• Treas. Reg. §301.6751(b)-1
• IRS, Independent Office of Appeals, Preparing a Request for Appeals
• IRM 8.11.5, International Penalties
• IRS Appeals Interim Guidance AP-08-0726-0054 (July 31, 2026)
• 26 U.S.C. §7422(a)
• Treas. Reg. §301.6402-2, Claims for Credit or Refund
• 26 U.S.C. §6532(a)
• IRM 13.1.24, Advocating for Case Resolution (Letter 854C and §6532(a))
• Flora v. United States, 362 U.S. 145 (1960)
• 26 U.S.C. §6601(e)(2)(A)
• IRS, Administrative Penalty Relief - Interest Relief

This article provides general information and does not constitute legal or tax advice. The appropriate response to a Form 5472 penalty depends upon the particular notice, taxable periods, ownership structure, transactions, filing history, collection posture, and available appeal rights.

About the Author

Chase Sizemore, JD, LLM, is Principal Attorney at Chase Counsel PLLC. His practice focuses on Federal Tax Controversy and Nonprofit & Tax-Exempt Organizations. He holds an LL.M. in Taxation from Georgetown University Law Center, is a former KPMG auditor, completed Columbia University Graduate Studies, and is admitted to practice before the U.S. Tax Court.

Chase Counsel represents selected clients in federal tax controversy matters, including international information-return penalty disputes.