Form 5472 and pro forma Form 1120: a starting point

Understand the purpose

Form 5472 reports specified transactions involving reporting corporations and related parties. The rules also address foreign-owned US disregarded entities. For entities within that category, the instructions explain the use of a pro forma Form 1120 as the filing attachment vehicle.

The word “pro forma” does not mean the filing is optional. It also does not establish the owner’s full income-tax obligations. Those questions need to be assessed separately.

Scope the entity and transactions

A preparer needs to understand ownership, classification, the tax year, and the nature of related-party dealings. Contributions, distributions, or amounts paid on the entity’s behalf can matter. The number of related parties and quality of records affect the preparation work.

Before choosing a package, say whether there are multiple owners or related parties, historical omissions, loans, or transactions in more than one currency. Do not reduce a transaction schedule to its net movement without discussing what information is required.

Organize the work

Create a chronological schedule with date, parties, amount, currency, and description. Keep bank statements, agreements, invoices, and formation expenses that support it. Identify any transactions outside the entity’s bank account.

• Confirm the entity classification.
• Identify all relevant related parties.
• Reconcile the full transaction schedule.
• Determine other applicable returns separately.

Use the current instructions

Submission methods, instructions, and relief provisions should be checked for the filing at hand. An incomplete or late information return can have consequences even where little income tax is due. If a prior filing may be missing, disclose that during scoping so the response can be considered before submitting a routine current-year package.