Head’s Up! Foreign-Owned Single Member US LLC: Increase in Penalties for Form 5472

My earlier blog post covered some basics about Form 5472, including how the Form helps the US Internal Revenue Service (IRS) learn about foreign-owned businesses in the US and when to audit them, the meanings of certain terms such as what is meant by a “reportable transaction” with a “related party”, and the situation requiring filing of the Form by a US company that is at least 25% owned by non-US shareholders that has such a reportable transaction.

Form 5472 is here and Instructions to Form 5472 here.

US Disregarded Entity (Foreign-Owned Single Member US LLC)

Beginning in 2017, Form 5472 filing requirements became applicable to single-member foreign-owned US LLCs. Since these are treated under the US tax rules as so-called “disregarded entities”, or tax “nothings” they are technically not “corporations” for US tax purposes.  Since this disregarded entity had foreign owners, they often had no tax filing requirements.  That changed with the issuance of IRS Treasury Regulations which subjected foreign-owned single-member US LLC’s to a brand new reporting regime that commenced with the 2017 tax year (i.e., returns due in 2018).

Foreign-owned single-member US LLC’s must now file Form 5472 and are subject to the same reporting, record maintenance and other related compliance requirements as those imposed on 25% foreign-owned US corporations.  Details, including the identity of the LLC’s non-US owner, are now disclosed when there is a “reportable transaction” occurring in the tax year. (If there is no “reportable transaction” in the particular tax year, the Form 5472 need not be filed).

Due Date is Soon Here for Many

The taxable year for the disregarded entity is the same as the taxable year of its owner.  As such the due date for Form 5472 will correspond with the due date for the income tax return for the owner of the LLC.  If the single owner US LLC is a foreign corporation the due date is April 15, 2019. A nonresident alien (NRA) must file a US income tax return (Form 1040NR) on or before June 15, so that date would control for purposes of filing Form 5472.

If an ITIN is required to file the Form 5472, this can take some time to obtain, so taxpayers should consult their tax advisors and begin the application process as soon as possible. NRA owners of single-member US LLCs may not need to obtain an ITIN simply to file the Form 5472.  See my earlier blog post here.

Penalty Increase

Failure to file a Form 5472 or maintain the supporting records as required could result in a civil penalty for each failure.  The penalty is not just a one-time assessment of a monetary fine; rather it is penalty for every year that either the form was not filed, or  proper records maintained.  If multiple filings should have been undertaken in the same year, the penalty amount can easily skyrocket.  Criminal penalties could also apply for failure to submit information or filing false or fraudulent information. Please note that filing a substantially incomplete Form 5472 constitutes a “failure to file” Form 5472. The penalty used to be US$10,000 for each failure. The amount has now been increased to $25,000 for filings due in 2019.

If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.

Dual National Couples in Community Property Jurisdictions

Many Latin American and European countries have community property regimes. Application of a foreign country’s community property laws raise serious US tax issues for a married couple, this is especially so when only one spouse is a US person.  Community property regimes can be especially troublesome when the non-US spouse owns what the individual believes is a “single member” US LLC.  The simple reason being that the community property rules deem the asset as owned by both the husband and wife and that means it has two members, not one.   You can learn more about this issue at my blog post here.

Posted March 28 2019

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