Form 5472 and US LLCs 2026: The Legal Reality Check (Farhy, Mukhi & the Consequences)
For a long time, the USD 25,000 penalty for a missing Form 5472 was said to be barely enforceable. Case law has since shifted clearly – especially for owners of a foreign-owned US LLC resident outside the US. A sober assessment, part 5 of our series on US company formation.
- ✛Foreign-owned single-member LLCs have had to file Form 5472 with a pro forma 1120 every year since 2017 – even without profit.
- ✛The penalty is USD 25,000 per form and year, with no cap.
- ✛The D.C. Circuit (2024) and 2nd Circuit (2026) confirmed the IRS's assessment authority.
- ✛Taxpayers without a US residence fall under the D.C. Circuit – the «Farhy defence» no longer holds there.
- ✛Without filing, the statute of limitations does not start; missing years should be filed with a justification.
What Form 5472 is and who must file it
Form 5472 was originally created for multinational groups to prevent profit shifting. For tax years beginning on or after 1 January 2017, however, it also covers US corporations at least 25 % foreign-owned and foreign-owned single-member LLCs treated by the IRS as a «disregarded entity».
Affected companies disclose all reportable transactions with the owner and related parties every year together with a pro forma Form 1120 – regardless of whether any profit was made.
The penalty is based on IRC Section 6038A(d): USD 25,000 per form and year, plus a further USD 25,000 for each 30-day period after an IRS notice – with no statutory cap.
The Farhy case law at a glance
The debate goes back to a series of rulings. They concerned a related provision – Section 6038(b) and thus Form 5471 – but set the direction for all international reporting obligations.
| Date | Case | Outcome |
|---|---|---|
| April 2023 | Farhy v. Commissioner (US Tax Court) | IRS lacks its own assessment authority and must sue via the Department of Justice |
| April 2024 | Mukhi v. Commissioner (US Tax Court) | Tax Court confirms its position for cases outside the D.C. Circuit |
| May 2024 | Farhy (D.C. Circuit) | Ruling reversed – IRS may assess the penalty administratively |
| February 2026 | Safdieh v. Commissioner (2nd Circuit) | Joins the IRS-friendly position |
This creates a circuit split: the D.C. Circuit and 2nd Circuit side with the IRS, while the Tax Court position for the 8th Circuit has not yet been decided on appeal. A Supreme Court ruling is possible but not scheduled.
The decisive nuance for foreign LLC owners
Which circuit has jurisdiction depends on the taxpayer's residence or principal place of business. For taxpayers without a residence or fixed place of business in the US – practically every foreign single member of an LLC – the D.C. Circuit automatically has jurisdiction.
The IRS-friendly ruling of May 2024 is therefore the controlling case law for this group. Anyone arguing that the circuit split «still leaves room» overlooks that their own jurisdiction lies with the court that has already ruled against taxpayers.
Does Farhy even apply to Form 5472?
The rulings concerned Section 6038(b) and Form 5471. Form 5472 is based on the separate but almost identically worded Section 6038A(d). Most experts consider the reasoning very likely transferable; there is no supreme-court-level case specifically on Form 5472 yet.
For foreign residents even this analogy barely helps: the underlying case law has already been decided in the IRS's favour in the D.C. Circuit.
Why waiting is no longer a strategy in 2026
- ✛Form 5472 is a statutory obligation, not an option – regardless of the risk of detection.
- ✛The earlier legal uncertainty has been resolved against taxpayers for the typical target group.
- ✛Data matching at US financial institutions – KYC/AML, matching EINs with account holders – has increased across the industry.
- ✛Anyone using a US bank account (such as Mercury or Relay) links EIN and account activity directly anyway.
We therefore recommend regular, timely filing – not as a risk calculation, but because it is an existing obligation whose challengeability has recently decreased rather than increased.
Statute of limitations: old years do not lapse automatically
For international information returns such as Form 5472, the limitation period generally only starts once the form is actually filed. If a form was never filed, the year in question theoretically remains open to examination indefinitely – unlike many deadlines that expire after three or six years.
The right way: reasonable cause and late filing
Missing years should not be filed without comment («quiet disclosure») – this can trigger an automatic penalty review. Two established routes are available:
- ✛Reasonable cause statement: a cover letter sets out understandable, non-culpable reasons for the delay. For first-time failures the IRS often grants penalty relief – but it is not guaranteed.
- ✛Delinquent International Information Return Submission Procedures: the structured IRS procedure for late international information returns, also requiring a reasonable cause statement.
Both routes belong in the hands of a licensed US tax adviser (CPA or Enrolled Agent) who can assess the number of years and your US financial profile.
How SWICOR supports you
SWICOR is not a licensed US tax firm and does not file Form 5472 itself. What we provide:
- ✛Clarifying your position: whether and to what extent your LLC has a reporting obligation and how your past compliance stands – also with regard to the choice of legal form.
- ✛Compliance calendar: deadlines for Form 5472 and the pro forma 1120, including extensions via Form 7004.
- ✛Referral: to licensed CPAs and Enrolled Agents specialised in international single-member LLCs.
- ✛Document preparation: capital contributions, withdrawals and payments to related parties compiled in a structured way.
- ✛Overall structure: assessment in combination with residence, other companies and US banking.
Form a US LLC – with clean compliance from day one.
Company formation USA →Conclusion
- ✛Form 5472 has been mandatory since 2017 for foreign-owned disregarded entities – base penalty USD 25,000.
- ✛The D.C. Circuit and 2nd Circuit have resolved doubts about IRS authority in the IRS's favour.
- ✛For foreign residents the D.C. Circuit has jurisdiction – this case law applies to them directly.
- ✛Transfer to Form 5472 is formally pending but considered very likely.
- ✛Missing years should be filed with a reasonable cause statement and a US tax adviser.
Frequently asked questions
Do I have to file Form 5472 every year, even without profit?
Yes. The obligation applies regardless of profit or activity if your LLC is at least 25 % foreign-owned, classified as a disregarded entity and has reportable transactions – which can include mere capital contributions or withdrawals.
Can the «Farhy defence» still be used in 2026?
For taxpayers without a US residence, practically no: they fall under the D.C. Circuit, which confirmed the IRS's assessment authority. In the 8th Circuit the position is still open.
Does the Farhy case law even apply to Form 5472?
The cases directly concerned Form 5471 (Section 6038(b)). For Form 5472 (Section 6038A(d)) there is no separate supreme-court-level case yet; experts expect the reasoning to apply by analogy.
What happens if I file late without comment?
A «quiet disclosure» can trigger an automatic penalty review. Filing with a reasonable cause statement, coordinated with a licensed US tax adviser, is the better route.
Do unfiled forms ever become time-barred?
No. Without filing, the limitation period generally does not start – the year theoretically remains open to examination indefinitely.
Can SWICOR file Form 5472 for me?
No, we are not a licensed US tax firm. We clarify your obligations, organise the documents and refer you to specialised US tax advisers.
Your US LLC compliance, properly set up
Whether ongoing filing or catching up on past years: we clarify your position and connect you with the right US tax adviser.
This article is a general analysis and does not replace individual tax or legal advice. Regulations change; the information reflects the status at the date of publication.