IRS guidance clarifies “liberal” reasonable cause relief for small corporations

In Chief Counsel Advice (CCA) 202617012, released April 24, 2026, the IRS Office of Chief Counsel provides guidance on how the “small-corporation provision” under Treas. Reg. §1.6038A 4(b)(2)(ii) (SCP) applies to penalties related to the failure of certain taxpayers to file required Form(s) 5472. 

Background

Section 6038A requires certain 25% foreign owned U.S. corporations to file Form 5472 and maintain records of related party transactions. The failure to file required Forms 5472 can trigger penalties of $25,000 per year as well as leave the federal statute of limitations open for the entire return under Section 6501(c)(8). While Section 6038A(d)(3) provides for general reasonable cause relief for failure to timely file required Forms 5472, the SCP improves the likelihood that such relief will be granted by providing that relief shall be applied liberally with respect to qualifying small corporations.

Qualifying for the SCP

To qualify for the SCP, a taxpayer must satisfy four conditions:

1. The taxpayer must have gross receipts of $20 million or less for the taxable year; the CCA notes this threshold applies to “overall” gross receipts (i.e., both U.S. and non-U.S. gross receipts);
2. The taxpayer must demonstrate that it lacked knowledge of the Section 6038A requirements, considering factors including 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;
3. The taxpayer must have limited presence in and contact with the United States, considering factors including 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; and
4.  The taxpayer must promptly and fully comply with IRS requests to file Form(s) 5472 and provide relevant records once the issue is identified, considering factors including 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.

Application of “liberal” relief provisions

Where a taxpayer qualifies for the SCP, Treas. Reg. §1.6038A-4(b)(2)(ii) provides that the reasonable cause exception of Section 6038A shall be applied “liberally.” In cases where the SCP is not applicable, obtaining reasonable cause relief requires (i) showing that the taxpayer acted in good faith and (ii) showing that reasonable cause existed for the failure that would otherwise result in the imposition of a monetary penalty. Although the SCP does not eliminate these requirements, the CCA explains that qualifying for the SCP should make it easier for a taxpayer to establish that reasonable cause relief should be granted.

The CCA further notes that, applying a plain-language definition of liberal, the IRS would generally be justified in concluding that a small-corporation taxpayer had reasonable cause 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 that it meets the conditions to qualify for the SCP. 

Practitioner perspective

This CCA is a welcome clarification for taxpayers that qualify for the SCP under Treas. Reg. §1.6038A 4(b)(2)(ii). Applying reasonable cause relief expansively where SCP requirements are met should help taxpayers who are unfamiliar with U.S. tax provisions and have limited contacts within the United States remediate missed filings more efficiently and equitably.