The IRS regulations issued as of 12/13/2016 (found here
) changed how the IRS treats Foreign Owned Single Member LLCs. While these regulations aren't "new" anymore, they are being overlooked and people are not complying. This is a problem because the penalties for noncompliance were just increased to $25,000 per form
Who is required to file?
If you are not a US person (not a US citizen or resident) and you own a US LLC, you need to report almost any transaction you had with your LLC to the IRS, each year. Again, these rules apply to single member limited liability companies (SMLLCs) which are foreign owned. The foreign owner could be an individual or a foreign company.
If a foreign person owns multiple LLCs, each LLC would have its own filing requirement. Each foreign-owned single member LLC is treated as a separate corporation for reporting purposes.
A foreign owned SMLLC would also have a filing requirement to report transactions with related parties. If a foreign person has two LLCs that are doing business with each other, each LLC would have a filing requirement. And if the LLC was transacting with a related foreign corporation this would be disclosed as well.
With the new regulations, transactions between the LLCs and their foreign owners must be reported on Form 5472. Form 5472 is due each year before April 15th.
What is a reportable transaction?
The transactions that trigger a Form 5472 filing obligation, include but are not limited to:
- Sales and purchases of real property, including tangible and intangible property;
- Other transfers of any interest in or a right to use any property or money;
- Amounts borrowed, loaned, advanced, or interests paid and received;
- Assignments, licenses, and leases;
- Transactions in relation to the formation, dissolution, acquisition, and disposition of the SMLLC. - - This includes contributions and distributions;
- Commissions paid and received.
Because the law change expanded reportable transactions to include contributions and distributions, virtually all transactions between the LLC and foreign owner would be a "reportable transaction" in one way or another.
New Compliance Requirements
In order to comply with the IRS rules, all new and existing LLCs which are wholly owned by foreign persons and have reportable transactions must do the following:
- Obtain an EIN after formation and designate a responsible person.
- Maintain adequate books and records for the purpose of tracking all transfers or payments of money or property between the LLC and the member, whether direct or indirect.
- Make books and records available to the IRS upon demand.
- File Form 5472, if any of the transactions between the LLC and the Member are considered "Reportable Transactions" (discussed above).
How to File
A single member LLC is default disregarded for tax purposes. Since US-disregarded entities generally do not have a US income tax-filing requirement, foreign owned SMLLCs required to file Form 5471 must go through additional administrative hurdles in order to comply with this filing requirement.
The form 5472 instructions provide that foreign-owned US-disregarded entities must attach the form 5472 to a pro forma form 1120 (“U.S. Corporation Income Tax Return”), meaning that these entities must file a US income tax return.
For each Form 5472 filed either late or incorrectly, the IRS assesses an automatic $10,000 penalty. The Tax Cuts and Jobs Act passed in 2017 included a provision to increase this penalty to $25,000 for years starting January 1, 2018.
This penalty is subject to increase another $25,000 for every 30 days after receiving notice from the IRS that Form 5472 is due. If the notices are not addressed within 90 days, the IRS will assess extra penalties.
The IRS is serious about these penalties. They mail out the letters automatically and are not lenient with late returns. If you file a day late, expect a letter.
Since a reporting corporation must file a separate form 5472 to show reportable transactions for each related party, the number of penalties imposed on a reporting corporation that fails to file on time can quickly add up. The penalty can be abated, however, if the reporting corporation can show that its failure to timely file was due to reasonable cause.
Fortunately, the reasonable cause standard is relaxed for “small” corporations with gross receipts less than $20 million and that have limited presence in, and contact with, the United States.
A foreign-owned LLC does not have to file Form 5472 if there are no reportable transactions. If you take the position there are not reportable transactions and the LLC is operating, it is highly recommended that the books and records are up to date and reflect this information.
Although the new regulations increase disclosure requirements, they do NOT impose a tax. For income tax purposes, single member LLCs remain disregarded entities. The Form 5472 is only an information return.
As long as the LLC has no income effectively connected with a US trade or business, there will be no US income tax liability.
If you are unsure if this new reporting requirement applies to you or your business and you'd like more information, click the link here to view our webinar specifically for foreign owners of US LLCs.
If you have other questions or would like us to prepare these forms for you, email us at firstname.lastname@example.org.