Chief Counsel Advice 202617012 (Apr. 24, 2026).

For tax practitioners advising foreign-owned domestic corporations, the reporting and record-maintenance requirements of I.R.C. § 6038A represent a critical compliance area with severe financial consequences for failures. Under I.R.C. § 6038A(a) and (b), any domestic corporation that is at least 25-percent foreign-owned must file an information return (Form 5472) to report transactions with related parties and must maintain records appropriate to determine the correct tax treatment of those transactions. If a reporting corporation fails to furnish this information or maintain these records, I.R.C. § 6038A(d)(1) mandates that "such corporation shall pay a penalty of $25,000 for each taxable year with respect to which such failure occurs".

Taxpayers may be excused from these penalties under the reasonable cause exception found in I.R.C. § 6038A(d)(3) and Treas. Reg. § 1.6038A-4(b). Generally, an affirmative showing must be made under penalties of perjury that the taxpayer acted in good faith and had reasonable cause for the failure. Recognizing that these requirements may disproportionately impact smaller entities, the Treasury Regulations contain a specific small-corporation provision (SCP). Treas. Reg. § 1.6038A-4(b)(2)(ii) instructs that the IRS "shall apply the reasonable cause exception liberally in the case of a small corporation".

Chief Counsel Advice (CCA) 202617012 was issued by the Office of Associate Chief Counsel (International) in response to a request from the Independent Office of Appeals. Because it is a CCA rather than a judicial court opinion, it does not adjudicate a specific taxpayer's dispute; rather, the memorandum is meant to address the administrative situations in which IRS personnel must evaluate a small corporation's claim for penalty relief under the SCP.

Questions Addressed by the Memorandum

The memorandum seeks to resolve administrative ambiguities regarding the exact operational mechanics of the SCP. The Chief Counsel explicitly addresses two primary questions: "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?".

Conclusions Reached by the IRS Chief Counsel

To address these questions, the IRS Chief Counsel lays out a bifurcated analysis detailing how a taxpayer qualifies for the provision and how the IRS must interpret the standard.

Determining Qualification for the Small-Corporation Provision

The memorandum concludes that a taxpayer must successfully establish four strict prerequisites to the satisfaction of the Secretary before the liberal application standard is triggered.

First, the taxpayer must be a small corporation, defined as having "overall gross receipts of $20,000,000 or less for the taxable year". The memorandum clarifies a critical distinction regarding this threshold, noting that unlike other section 6038A exceptions, "the SCP looks to overall gross receipts, not just U.S. gross receipts".

Second, the taxpayer must "establish lack of knowledge of section 6038A requirements". In evaluating this, the IRS will scrutinize historical compliance, analyzing "whether any Forms 5472 had been previously filed by the taxpayer and whether any party that owned or controlled the taxpayer... owned or controlled any other entity that had filed a Form 5472". The memorandum points out that a qualifying taxpayer "may not be aware of the existence of the SCP" itself, but can still qualify for its protections.

Third, the taxpayer must "establish limited presence in and contact with the United States". The IRS assesses this factor by looking at "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".

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)". The IRS will consider "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 fails to satisfy all four prerequisites, they are not entitled to the SCP, though the IRS should still consider if the taxpayer meets the general, non-liberal reasonable cause standard.

Defining the Liberal Application of Reasonable Cause

The most significant conclusion reached by the Chief Counsel defines how the IRS should interpret the word "liberally." The memorandum concludes that a liberal application "has bearing on the IRS’s level of scrutiny in considering a taxpayer’s request for reasonable cause relief".

Noting that dictionary definitions of "liberal" include "marked by generosity: openhanded," and "not strict or exact," the memorandum states that "qualifying for the SCP makes it easier for a taxpayer to establish that reasonable cause relief should be granted". When a taxpayer establishes the four prerequisites via a written statement signed under penalties of perjury, "the IRS ordinarily would be justified in finding that it is appropriate to grant reasonable cause relief... without further inquiry or investigation".

However, the Chief Counsel emphasizes that "liberal" does not mean automatic or blind relief. The memorandum concludes that it would not "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".

Finally, the memorandum clarifies the statutory mechanics of the ultimate relief granted. A finding of reasonable cause under the SCP "has the effect of extending the taxpayer’s deadline to furnish information... without a penalty". However, "it does not excuse the taxpayer from the requirement to file Form 5472 or maintain records, nor from IRS requests for information". The liberal application governs only whether penalty relief is granted, not the substantive level of ultimate tax compliance required.

Prepared with assistance from NotebookLM.