When would California FTB waive the historical $10,000 penalty for failing to timely file Form 5472 copies or maintain required records?

Plain-English summary

Legal Ruling 1996-3 explained when FTB would use its discretion to waive the historical penalty for failing to timely file California copies of federal Forms 5472 or maintain required records.

The ruling quoted a $10,000 penalty for each failure. Reasonable cause could excuse a failure under the federal-linked rules. If reasonable cause was absent, section 21015 still allowed discretionary relief when the failure did not jeopardize California's best interests and did not result from willful neglect or an intent not to comply.

Timing mattered. A prompt correction before FTB needed the forms for audit selection could receive relief; a correction only after audit selection had been impaired did not.

The historical requirements

Revenue and Taxation Code section 19141.5(a) required a penalty for failing to provide information or maintain records under Internal Revenue Code section 6038A.

The ruling described the penalty as $10,000 for each untimely Form 5472 copy and for a record-maintenance failure.

Section 21015 separately authorized FTB, effective January 1, 1996, to refrain from imposing or waive covered penalties assessed or imposed on or after January 1, 1995. The decision was case-specific.

Situation 1: no explanation

The taxpayer did not timely file Forms 5472 and supplied no facts explaining why.

Result: The penalty was imposed because FTB lacked enough information to evaluate the failure.

Situation 2: prompt correction before audit selection

The taxpayer said it was unaware of the California copy-filing requirement. It filed the forms immediately after learning of the requirement, added the obligation to its Tax Compliance Tracking System, and submitted the explanation and forms within six months of filing the return—before FTB needed them for audit selection.

Reasonable cause: No. The ruling said ignorance of the law did not establish reasonable cause.

Section 21015 relief: Yes. Prompt compliance, a preventive control, and availability of the forms before audit selection showed intent to comply and avoided harm to the state's interests.

Situation 3: omission discovered during audit

The facts otherwise resembled Situation 2, but FTB did not receive the forms before reviewing the return for audit selection. The omission was discovered during the audit, and the taxpayer supplied the forms at the auditor's request. The ultimate audit adjustments did not involve the intercompany transactions reported on Form 5472.

Result: No relief. The missing forms had already impaired the auditor's ability to evaluate the return's audit potential. The fact that final adjustments concerned other matters did not undo that harm.

Situation 4: repeated late filings

The taxpayer repeatedly failed to timely submit Forms 5472.

Result: No relief. Repeated noncompliance did not demonstrate an intent to follow the statutory requirements.

What this means for you

Foreign-owned or reportable corporations

Track the California filing obligation separately from the federal filing. Completing the federal form did not by itself satisfy the California copy requirement described in the ruling.

Tax compliance teams

Document corrective action in a formal compliance calendar or tracking system. In Situation 2, the new control was part of the evidence supporting discretionary relief.

Penalty-abatement requests

Act before the missing information affects audit administration. Explain the cause, submit the forms immediately, show the state's interests were not harmed, and identify the process change that will prevent repetition.

Common questions

Q: Was ignorance of the California filing requirement reasonable cause?

A: No. The ruling expressly rejected ignorance of the law as reasonable cause.

Q: Could the taxpayer still receive discretionary relief?

A: Yes in Situation 2 because it corrected promptly before audit selection and implemented a compliance control.

Q: Did it matter that the audit adjustment was unrelated to Form 5472 transactions?

A: No. Situation 3 denied relief because the missing forms impaired audit selection when FTB needed them.

Q: What happened with repeated late filings?

A: FTB denied relief because the pattern did not show intent to comply.

Q: Is the penalty still $10,000 today?

A: This page reports the amount quoted in the 1996 ruling. Current federal and California penalty amounts must be checked separately.

Citations and references

• Cal. Rev. & Tax. Code §§ 19141.5(a) and 21015
• I.R.C. § 6038A
• Treas. Reg. §§ 1.6038A-2, 1.6038A-3, and 1.6038A-4(b)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 1996-3

Original ruling text

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Legal ruling 1996-3

July 3, 1996

Subject: Revenue and Taxation Code Section 21015--Relief from Penalty Imposed Under Section 19141.5(a) Form 5472/Record Maintenance Penalty)

Issue

What are some examples of situations in which the Franchise Tax Board (FTB) will or will not use Revenue and Taxation Code §21015 to refrain from imposing or waive the penalty imposed under Revenue and Taxation Code §19141.5(a)?

Facts

Situation 1: Taxpayer has not timely filed copies of federal forms 5472 with FTB.

Situation 2: Same as Situation 1 except the taxpayer writes to FTB explaining that the reason copies of the federal forms 5472 were not timely filed was because the taxpayer was not aware of the California filing requirement for copies of federal forms 5472 when the return was filed. The taxpayer filed the copies of the federal forms 5472 immediately upon learning of the California filing requirement and has taken steps to ensure the situation does not recur by adding the filing requirement to the "Tax Compliance Tracking System" it maintains to monitor tax filing requirements. Taxpayer submits this explanation and the required copies of federal forms 5472 within six months of the filing of the return and prior to FTB needing the forms for audit selection purposes.

Situation 3: Same as Situation 2 except the taxpayer did not submit the required copies of federal forms 5472 prior to FTB needing the forms for audit selection purposes. The failure to file the copies of the federal forms 5472 was discovered during the course of an audit of the tax returns. At the auditor's request, the taxpayer submitted the forms. The audit adjustments ultimately proposed by the auditor did not relate to the intercompany transactions reported on the copies of the federal forms 5472.

Situation 4: Same as Situation 2 except that the taxpayer has repeatedly failed to timely file copies of the federal forms 5472.

Law and Analysis

Under Revenue and Taxation Code §21015, the Franchise Tax Board has discretionary authority, effective January 1, 1996, to either refrain from imposing or to waive penalties authorized under §19141.5(a). The determination must be made, "on a case-by-case basis, that the failure to comply did not jeopardize the best interests of the state and is not due to any willful neglect or any intent not to comply." This authority is limited to penalties that may be or were assessed or imposed on or after January 1, 1995.

Under Revenue and Taxation Code §19141.5(a), a penalty is required to be imposed for failure to furnish information or maintain records as provided in Internal Revenue Code §6038A . The penalty is $10,000 for each failure to timely file copies of federal forms 5472 and for failure to maintain or cause another to maintain the required records. (Treasury Regulation §§1.6038A-2 and 1.6038A§3.)

Certain failures may be excused for reasonable cause for failure to furnish the information or maintain the records. (Internal Revenue Code §§6038A(d)(3); Treasury Regulation §1.6038A-4 (b).)

Holdings

Revenue and Taxation Code §21015 will be applied to the above factual situations as follows:

Situation 1: Here, there is not enough information to determine the reason for the failure. Consequently, the penalty will be imposed.

Situation 2: Because ignorance of the law does not constitute reasonable cause, the penalty would not be waived for reasonable cause. However, because the taxpayer submitted the forms prior to FTB needing them for audit selection purposes and demonstrated an intent to comply by taking steps to ensure that the situation will not be repeated in the future coupled with immediate compliance upon learning of the filing requirements, the penalty will be waived under §21015.

Situation 3: As noted in the Holding for Situation 2, ignorance of the law does not constitute reasonable cause to waive the penalty. Furthermore, in this situation, no relief from the penalty will be granted under §21015. Although the taxpayer has indicated that it would take steps to ensure the situation would not recur, the fact that copies of the federal forms 5472 were not filed at the time the return was reviewed for audit selection purposes impeded the auditor's ability to effectively determine the audit potential of the return.

Situation 4: As noted in the Holding for Situation 2, ignorance of the law does not constitute reasonable cause. Furthermore, in this situation, no relief from the penalty will be granted under §21015. Continued failure to timely file copies of the federal forms 5472 does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

Drafting Information

The principal author of this notice is Karen D. Smith of the Franchise Tax Board Legal Branch. For further information regarding this notice, contact Ms. Smith at the Franchise Tax Board Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95721-1720.

Last updated: 09/24/2025