The IRS Hit Us with a $25,000 Penalty. We Appealed — and Won a Year Later

How It Started

One of our clients opened a US C-Corporation and asked us to prepare a zero tax return. Zero means the company had no activity for the year: no income, no expenses, no transactions. We prepared Form 1120 with zeros, strictly by the book.

Some time later, a letter from the IRS arrived with a $25,000 penalty.

For what? For not filing Form 5472 — the special information return required of US corporations (and foreign-owned single-member LLCs) that are at least 25% owned by a foreign person. By our reading of the applicable IRS rules, the form is required only when there are reportable transactions with foreign related parties. If there were no such transactions — the form is not required. We acted on that reading. The IRS disagreed.

So — what now.

Step One: Don't Panic and Read Carefully

Getting a letter from the IRS is stressful on its own. Even more so when it says $25,000. But the important thing to understand: a letter like this is not a verdict. It's a notice — and you're allowed to disagree.

Taxpayers have a right to an appeal (protest). This is a formal procedure handled by a separate body — the IRS Independent Office of Appeals, physically separated from the people who issued the penalty. You explain in writing why you believe the decision is wrong and attach evidence. Appeals is required to consider it.

We told the client right away: if the information he gave us was accurate, then we were right and Form 5472 truly wasn't required in this situation. Which means there's a basis for a protest.

The client confirmed: the return was genuinely zero, no reportable transactions had occurred.

Step Two: The Appeal — and a Critical Deadline

This is the part many people don't know about.

We re-examined the applicable rules, assembled the supporting record — a copy of the return, an accounting memo confirming the absence of related-party payments, references to the relevant IRC sections and Treas. Reg. — and prepared the formal protest.

We sent it by USPS Certified Mail with Return Receipt — the standard for filings like this. Certified Mail gives you an official receipt that the document reached the right IRS unit. In a dispute with the IRS this matters: you can demonstrate at any later point that the protest was submitted within the deadline.

Date filed: April 2025.

Step Three: Wait. Sometimes a Long Time

After the protest is filed, the hardest part begins — waiting.

IRS Appeals is a separate office and, in 2025–2026, severely backlogged. On matters like this, the review takes anywhere from several months to over a year. During that time the IRS periodically sends acknowledgement letters confirming your case is still being worked, with no decision yet.

This is normal. It does not mean something went wrong. It means the Appeals Officer is studying both the IRS's position and our argument.

We kept the client informed and waited.

The Result: One Year and Two Months Later

May 2026. We received a formal letter from the IRS.

Appeal accepted. The $25,000 penalty is cancelled.

The IRS agreed: Form 5472 in this situation was not required. We were right from the start.

This case took more than a year. But the result — a cancelled $25,000 penalty — confirmed something: you can and you should argue with the IRS when you have grounds. The key is doing it correctly and on time. — Anton Chekhov, founder and CEO of Edeal

What This Means in Practice

The IRS makes mistakes. The system is enormous and errors are not unusual. That's not a reason to treat the IRS lightly — but it's also not a reason to accept any letter from them as a final decision.

An appeal is a working tool. If you have grounds to believe a penalty was issued in error, it's worth contesting. The keys: don't miss the 30-day window and formulate the position properly — cite the applicable sections of law, cite the facts, attach the documents.

From our practice: if you're a non-resident filing a zero return for a US corporation with 25%+ foreign ownership or for a foreign-owned single-member LLC — in most cases it's simpler to file Form 5472 preemptively with the return, even when a strict reading of the rules doesn't require it. That's cheaper and quieter than dealing with notices later. More on the form itself in our separate article.

Don't ignore IRS letters. Even when you're sure you're right. Even when the letter looks like an obvious mistake. Silence is read as agreement — and after 30 days the penalty becomes final.

When to Bring in a CPA

An appeal is not "write to the IRS that they're wrong." It's a legal document referencing specific Internal Revenue Code sections, Treasury Regulations and, where relevant, case law. The argument has to hold up under scrutiny from an Appeals Officer who has many similar cases on the desk at the same time.

If you received a penalty letter from the IRS — the first reaction shouldn't be "pay it just to be done" or "throw it out and hope they forget." The first reaction is open the envelope, look at the date, and figure out how many of those 30 days you have left.

The next step is talking to a CPA (Certified Public Accountant — a licensed US accountant authorized to represent clients before the IRS). The CPA confirms or rejects the basis for a protest and, if there is a basis, prepares the document.

What to Do Right Now

If there's an IRS envelope on your desk you've been postponing — open it and look at the date. The 30-day counter runs from there, not from the day you opened the letter.

If you have a US corporation with 25%+ foreign ownership or a foreign-owned single-member LLC — check whether Form 5472 was filed for the last tax year. If it wasn't and there were related-party transactions, that's a reporting gap better closed before a notice arrives.

If you had any related-party flows with a foreign company (loans, licenses, services, royalties) — that automatically makes you a 5472 candidate, and it's worth confirming those are reflected correctly in the return.