Foreign owners of a single member U.S. LLC must file a new form with the U.S. government beginning on or after January 1, 2017. Disregarded entities for tax purposes (including single member LLCs) wholly owned by foreign persons must now file a Form 5472 with the Internal Revenue Service (IRS).
Previously, foreign owners did not have to report their U.S. activities. However, with the release of the Panama Papers, increased scrutiny towards foreign ownership of U.S. assets has arisen.
It is important to know that the new rules only create informational reporting obligations. Filing Form 5472 does not in and of itself create a U.S. federal income tax liability for the foreign owner based on their entity’s activities in the U.S. But it may lead to such taxation. As always, it is strongly recommended that clients work with accountants and tax advisors experienced in both the U.S. and their home country tax systems.
Many IRS filings are subject to de minimis exceptions, meaning when the amount involved is small enough you don’t have to file. Interestingly, no such exception applies to Form 5472. Even if the amount is ten cents you have to file. The IRS clearly wants to know what is going on.
Their interest is evidenced by the penalties. Failure to file a Form 5472 for each entity results in an initial penalty of $10,000 per entity. After 90 days the penalty is increased by $10,000 for each 30 day period in which the filing is not made.
These significant penalties call for you to discuss the filing of Form 5472 with your advisor. The IRS will not send you a notice that the form must be filed. (Chances are they are not even aware of your entity yet.) Please be proactive with your advisors to avoid any problems and penalties.
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