How the "small corporation" rule eases Form 5472 penalty relief under 6038A

Plain-English summary

Section 6038A requires a U.S. corporation that is at least 25% foreign-owned to
file Form 5472 reporting its transactions with related parties and to keep
supporting records. Missing that filing carries a $25,000 penalty, with more
piling up if the failure continues after IRS notice. There is a reasonable-cause
exception, and a regulation tells the IRS to apply it "liberally" for a
qualifying "small corporation." The Independent Office of Appeals asked Chief
Counsel two questions: when does a company qualify, and what does "liberally"
mean. This Chief Counsel Advice explains that a company qualifies for the
small-corporation provision by establishing four things: gross receipts of
$20 million or less for the year, no knowledge of the 6038A requirements,
limited presence and contact in the United States, and prompt, full compliance
with IRS requests to file Form 5472 and hand over records. "Liberally" means
the IRS applies lighter scrutiny: once those four factors are shown in a
perjury-signed statement, the IRS is ordinarily justified in granting relief
without further investigation, unless the submission is conclusory or known
facts undercut the taxpayer's good faith. Reasonable cause extends the deadline
and removes the penalty, but does not excuse the taxpayer from filing or
keeping records. This matters because small foreign-owned U.S. companies that
missed Form 5472 filings can more readily get steep penalties waived if they
fit the small-corporation profile.

Ruling snapshot

• Question: When does a corporation qualify for the § 1.6038A-4(b)(2)(ii) small-corporation provision, and what does "apply the reasonable cause exception liberally" mean?
• Outcome: Advice (guidance to the Office of Appeals; no penalty determination made)
• Key authorities: IRC § 6038A(a), (d); Treas. Reg. § 1.6038A-4(b); H.R. Rep. 101-247 (1989)

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 202617012
Release Date: 4/24/2026
CC:INTL:B07
POSTS-100037-21

UILC: 6038A.04-05

date: December 17, 2024

to: Russell McGeehan
Tax Law Specialist
(Independent Office of Appeals, Area 11)

from: Nathaniel Parker
Senior Technical Reviewer
(Branch 7, Office of Associate Chief Counsel (International))

subject: Reasonable Cause Relief for Small Corporations under Treas. Reg. § 1.6038A-
4(b)(2)(ii)

This Chief Counsel Advice responds to your request for assistance. This advice may
not be used or cited as precedent.

ISSUES

Section 6038A(d) of the Code establishes a monetary penalty for the failure to furnish
information or to maintain records as required by § 6038A and related regulations.
Certain failures, including failures to timely file an information return on Form 5472 as
required under Treas. Reg. § 1.6038A-2 and to maintain records as required under
Treas. Reg. § 1.6038A-3, may be excused for reasonable cause. Treas. Reg.
§ 1.6038A-4(b)(2)(ii) provides a special rule stating that relief for reasonable cause shall
be applied "liberally" in the case of a small corporation meeting certain requirements
("small-corporation provision" or "SCP"). When does a corporation qualify for liberal
application of the reasonable cause exception under the SCP, and what does it mean to
"apply the reasonable cause exception liberally" in this context?

LEGAL BACKGROUND

Code
Section 6038A requires certain corporations to report certain related-party transactions
and maintain relevant records. Specifically, § 6038A(a) provides:

     If, at any time during a taxable year, a corporation (hereinafter in this
     section referred to as the "reporting corporation")—
              (1) is a domestic corporation, and
              (2) is 25-percent foreign-owned,
     such corporation shall furnish, at such time and in such manner as the
     Secretary shall by regulations prescribe, the information described in
     subsection (b) and such corporation shall maintain (in the location, in the
     manner, and to the extent prescribed in regulations) such records as may
     be appropriate to determine the correct treatment of transactions with
     related parties as the Secretary shall by regulations prescribe (or shall
     cause another person to so maintain such records).

Section 6038A(d)(1) provides for a penalty of $25,000 for the failure to furnish such
information1 or maintain such records, and § 6038A(d)(2) provides for an additional
$25,000 penalty for each 30-day period (or fraction thereof) that the failure continues
beyond 90 days from IRS notice of the failure to the taxpayer.2

Section 6038A(d)(3) provides an exception to these penalties for "reasonable cause."
This exception is structured as extending the corporation's time to comply before the
penalty applies:

     For purposes of this subsection, the time prescribed by regulations to
     furnish information or maintain records (and the beginning of the 90-day
     period after notice by the Secretary) shall be treated as not earlier than the
     last day on which (as shown to the satisfaction of the Secretary)
     reasonable cause existed for failure to furnish the information or maintain
     the records.

Regulations
Pursuant to Treas. Reg. § 1.6038A-1(b), the reportable information is to be furnished on
Form 5472 annually.

1
A failure to furnish such information includes failure to file a Form 5472 as well as the filing of a substantially
incomplete Form 5472. See Treas. Reg. § 1.6038A-4(a).
2
"Taxpayer" includes a reporting corporation, regardless of whether it owes any taxes in any particular
year.

Treas. Reg. § 1.6038A-4 provides rules for application of the monetary penalty for
noncompliance with the reporting and record maintenance requirements of § 6038A.
Treas. Reg. § 1.6038A-4(a)(1) provides that, in general:

   If a reporting corporation fails to furnish the information described in
   §1.6038A-2 within the time and manner prescribed in § 1.6038A-2(d), fails
   to maintain or cause another to maintain records as required by
   § 1.6038A-3, or (in the case of records maintained outside the United
   States) fails to meet the non-U.S. record maintenance requirements within
   the applicable time prescribed in § 1.6038A-3(f), a penalty of $25,000 shall
   be assessed for each taxable year with respect to which such failure
   occurs.

Under Treas. Reg. § 1.6038A-4(b), the reasonable cause exception applies only if an
affirmative showing is made that (i) the taxpayer acted in good faith and (ii) there is
reasonable cause for a failure that results in the assessment of the monetary penalty.
The affirmative showing is required of all reporting corporations and must be made "to
the satisfaction of the Secretary" pursuant to § 6038A(d)(3). The requisite showing is
further described in Treas. Reg. § 1.6038A-4(b)(2).

Treas. Reg. § 1.6038A-4(b)(2)(i) provides that "the reporting corporation must make an
affirmative showing of all the facts alleged as reasonable cause for the failure in a
written statement containing a declaration that it is made under penalties of perjury."
Under Treas. Reg. § 1.6038A-4(b)(2)(iii), the determination of whether a taxpayer acted
with reasonable cause and in good faith is made on a case-by-case basis, taking into
account all pertinent facts and circumstances. The regulation goes on to provide:

   Circumstances that may indicate reasonable cause and good faith include
   an honest misunderstanding of fact or law that is reasonable in light of the
   experience and knowledge of the taxpayer. Isolated computational or
   transcriptional errors generally are not inconsistent with reasonable cause
   and good faith. Reliance upon an information return or on the advice of a
   professional (such as an attorney or accountant) does not necessarily
   demonstrate reasonable cause and good faith. Similarly, reasonable
   cause and good faith is not necessarily indicated by reliance on facts that,
   unknown to the taxpayer, are incorrect. Reliance on an information return,
   professional advice or other facts, however, constitutes reasonable cause
   and good faith if, under all the circumstances, the reliance was
   reasonable.

In determining whether a taxpayer acted with reasonable cause, Treas. Reg.
§ 1.6038A-4(b)(2)(ii) provides rules in the case of "small" corporations, a subset of
reporting corporations. Treas. Reg. § 1.6038A-4(b)(2)(ii) provides as follows:

   The District Director shall apply the reasonable cause exception liberally in
   the case of a small corporation that had no knowledge of the requirements
    imposed by section 6038A; has limited presence in and contact with the
    United States; and promptly and fully complies with all requests by the
    District Director to file Form 5472, and to furnish books, records, or other
    materials relevant to the reportable transaction. A small corporation is a
    corporation whose gross receipts for a taxable year are $20,000,000 or
    less.

This rule for small corporations mirrors nearly verbatim a relevant passage from the
legislative history of § 6038A (at the time, the predecessor to the current versions of
§§ 6038A and 6038C), which states:

    The committee expects that such reasonable cause exceptions will be
    allowed liberally in cases of small corporations that (1) had no knowledge
    of the requirements imposed by section 6038A, (2) have limited presence
    in and contact with the United States, and (3) promptly, fully and
    completely comply with all IRS requests (including requests to the
    corporation on behalf of any related foreign party) to furnish books,
    records, and other data that may be relevant or material to any reportable
    transaction.

H.R. REP. 101-247, 101st Cong., 1st Sess. at 729 (1989); see also S. PRT. 101-56,
101st Cong., 1st Sess. at 117 (1989).

ANALYSIS

You have asked (1) how a taxpayer qualifies for the SCP and (2) what it means to apply
the reasonable cause exception "liberally" in the case of a qualifying small corporation
per Treas. Reg. § 1.6038A-4(b)(2)(ii).

1. Whether a Taxpayer Qualifies for the Small-Corporation Provision
   For a taxpayer to receive reasonable cause relief utilizing the SCP, the Secretary must
   first determine that the requirements of the SCP described in Treas. Reg. § 1.6038A-
   4(b)(2)(ii) are met. We expect that this determination typically would be made on the
   basis of a written statement signed under penalties of perjury, as described in Treas.
   Reg. § 1.6038A-4(b)(2)(i), and the interactions between the taxpayer and the IRS. The
   existence of reasonable cause for a corporation's failure to furnish the information or to
   maintain the necessary records must be shown "to the satisfaction of the Secretary."
   I.R.C. § 6038A(d)(3).

There are four prerequisites for the SCP, which, conforming to the standard of proof
under section 6038A(d) generally, should be established to the satisfaction of the
Secretary before the reasonable cause relief may be applied "liberally." First, a
taxpayer must have overall gross receipts of $20,000,000 or less for the taxable year.3
3
Treas. Reg. § 1.6038A-4 does not explain how to calculate a taxpayer's gross receipts for this purpose.
There is a different "small corporation exception" under Treas. Reg. § 1.6038A-1(h), which applies only to

Second, the taxpayer must establish lack of knowledge of section 6038A requirements.
Third, the taxpayer must establish limited presence in and contact with the United
States. Fourth, the taxpayer must establish full and prompt compliance with IRS
requests to file Form(s) 5472 and to provide materials relevant to the reportable
transaction(s). A corporation that lacked knowledge of the requirements imposed by
§ 6038A may not be aware of the existence of the SCP. Nonetheless, the taxpayer may
have the ability to meet the requirements, even if unaware of them. Where a taxpayer
establishes that it has met the four prerequisites, then the SCP applies, and the IRS
shall accordingly apply the reasonable cause exception liberally. 4

In determining whether the taxpayer established a lack of knowledge of the section
6038A requirements, the IRS could consider factors including, but not limited to,
whether any Forms 5472 had been previously filed by the taxpayer and whether any
party that owned or controlled the taxpayer at the time the Form 5472 was due owned
or controlled any other entity that had filed a Form 5472.

In determining whether the taxpayer's presence in and contact with the United States
was limited, the IRS could consider factors including, but not limited to, the experience
and location of the taxpayer's corporate officers and managers, the number and size of
transactions with customers located in the United States, and the degree to which the
taxpayer's operations involved interactions with individuals, businesses, and federal,
state, and local governments in the United States.

In determining whether the taxpayer's corrective measures are satisfactory, the IRS
could consider factors including, but not limited to, how timely the taxpayer responded
to requests by the IRS to file Forms 5472 and to furnish the relevant materials, how
complete the responses were, whether there was a need to follow up multiple times to
receive necessary details, and whether information supplied was consistent or any
changes were adequately justified.

If a taxpayer seeks relief under the SCP but fails to satisfy all of its prerequisites—and
thus is not entitled to "liberal" application of the reasonable cause exception—the IRS
should consider whether the taxpayer nevertheless satisfies the general reasonable
cause standard described in Treas. Reg. § 1.6038A-4(b).

certain reporting corporations having "U.S. gross receipts" less than $10,000,000 but which has no effect
on the reasonable cause rules, instead exempting such a reporting corporation from Treas. Reg.
§ 1.6038A-3 record-maintenance and Treas. Reg. § 1.6038A-5 authorization-of-agent requirements.
Treas. Reg. § 1.6038A-1(h) provides limited guidance for measuring "U.S. gross receipts" in the context
of determining that exception's applicability (e.g., aggregation of gross receipts of related reporting
corporations). Note, however, that the SCP looks to overall gross receipts, not just U.S. gross receipts.

4
The IRS may consider adopting a policy of inquiring about the facts needed to evaluate application of
the SCP if the facts and circumstances of the case indicate the SCP may be relevant, even where the
taxpayer does not initially or formally raise the provision as a basis for relief. Such facts and
circumstances should be duly corroborated before relief is provided.

2. "Liberal" Application of the Reasonable Cause Exception
   A "liberal" application of the reasonable cause exception has bearing on the IRS's level
   of scrutiny in considering a taxpayer's request for reasonable cause relief. In an
   ordinary case, the requisite showing in support of reasonable cause relief under Treas.
   Reg. § 1.6038A-4(b)(1) has two components that the taxpayer must establish to the
   satisfaction of the Secretary: (i) a showing that the taxpayer acted in good faith; and
   (ii) a showing that reasonable cause existed for the failure that would otherwise result in
   the imposition of a monetary penalty. In the case of a taxpayer that has established the
   SCP factors, the IRS ordinarily would be justified in finding that it is appropriate to grant
   reasonable cause relief. Although the SCP does not eliminate the requisite showing
   requirements under Reg. § 1.6038A-4(b)(1), qualifying for the SCP makes it easier for a
   taxpayer to establish that reasonable cause relief should be granted.

As provided in § 6038A(d)(3), a finding of reasonable cause (whether under the general
standard or under the SCP) has the effect of extending the taxpayer's deadline to
furnish information described in § 6038A(b) or to maintain records as required by
§ 6038A(a) without a penalty. It does not excuse the taxpayer from the requirement to
file Form 5472 or maintain records, nor from IRS requests for information. In other
words, the "liberalness" of the SCP relates only to whether reasonable cause relief is
applicable in the particular case, and not, for example, to the level of compliance that is
ultimately required.5

There is no Code definition of the word "liberally," but the pertinent dictionary definition
of "liberal" includes "marked by generosity: openhanded," and "not strict or exact."
Merriam-Webster.com Dictionary, https://www.merriam-webster.com/dictionary/liberal
(accessed October 22, 2024).6

Applying this plain-language definition, the IRS would be justified in concluding that a
small-corporation taxpayer had reasonable cause (and, accordingly, removing
associated section 6038A(d) penalties) if the taxpayer promptly and fully cooperated in
filing Forms 5472 and furnished relevant information on request and if the taxpayer's
written submission (signed under penalties of perjury) establishes the other factors
described in Treas. Reg. § 1.6038A-4(b)(2)(ii) to the satisfaction of the Secretary. This
does not mean, however, that it would be appropriate for the IRS to grant relief based
upon a conclusory submission by the taxpayer with no supporting factual
representations or evidence, or to ignore known facts that cast doubt on the veracity or
completeness of the taxpayer's written statement or on the taxpayer's good faith.
Absent such problems, the IRS would generally be justified in determining that

5
The SCP also does not address the amount of the penalty that would apply if reasonable cause relief is
not granted. Nor does the SCP apply to other penalty regimes, such as "accuracy-related" penalties under
section 6662, although the underlying facts and circumstances of the case may be relevant to abating
various penalties.
6
The Black's Law Dictionary (12th ed. 2024) entries for "liberal" and "liberal interpretation" are broadly
consistent with this meaning.

reasonable cause relief could be granted on the basis of the taxpayer's submission(s)
without further inquiry or investigation.

Please call (202) 317-4382 (Michelle Philips) or (202) 317-5457 (Anand Desai) if you
have any further questions.