On December 13, 2016, the IRS issued T.D. 9796, which created a new reporting requirement for owners of U.S. limited liability companies that are owned solely by one member that is a “foreign person.” A U.S. LLC with both of these traits is called a “reportable disregarded entity.” This new reporting requirement is set forth in Treasury Regulation 26 CFR 1.6038A-1.
Every LLC that is a reportable disregarded entity will be treated as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under section 6038A of the Internal Revenue Code. Translation: LLCs that are reportable disregarded entities will be treated as corporations with respect to the reporting obligations under section 6038A.
Reportable disregarded entities are subject to the IRS’s new information reporting requirements with respect to tax years that begin on or after January 1, 2017, and that end on or after December 13, 2017. The first returns will be due in early 2018. The taxable year of a reportable disregarded entity is the same as the taxable year of the foreign person if the foreign person has a U.S. income tax or information return filing obligation for its taxable year otherwise it is the calendar year.
A reportable disregarded entity that has one or more “reportable transactions” with a “related party” during a tax year must file an IRS Form 5472 (see the instructions) along with an IRS Form 1120. A reportable transaction is:
- Any type of transaction listed in Part IV [of Form 5472] (e.g., sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year, ore
- Any transaction or group of transactions listed in Part IV [of Form 5472], if . . . Any part of the consideration paid or received was not monetary consideration, or . . . Less than full consideration was paid or received.
Reportable transactions are:
- Sales of stock in trade (inventory)
- Sales of tangible property other than stock in trade
- Platform contribution transaction payments received
- Cost sharing transaction payments received
- Rents received (for other than intangible property rights)
- Royalties received (for other than intangible property rights)
- Sales, leases, licenses, etc., of intangible property rights (e.g., patents, trademarks, secret formulas)
- Consideration received for technical, managerial, engineering, construction, scientific, or like services
- Commissions received
- Amounts borrowed
- Interest received
- Premiums received for insurance or reinsurance
- Other amounts received
- Purchases of stock in trade (inventory)
- Purchases of tangible property other than stock in trade
- Platform contribution transaction payments paid
- Cost sharing transaction payments paid
- Rents paid (for other than intangible property rights)
- Royalties paid (for other than intangible property rights)
- Purchases, leases, licenses, etc., of intangible property rights (e.g., patents, trademarks, secret formulas)
- Consideration paid for technical, managerial, engineering, construction, scientific, or like services
- Commissions paid
- Amounts loaned
- Interest paid
- Premiums paid for insurance or reinsurance
- Other amounts paid
The terms “paid” and “received” include accrued payments and accrued receipts.
A related party is any of the following:
- Any direct or indirect 25% foreign member of the reportable disregarded entity.
- Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reportable disregarded entity.
- Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign member of the reportable disregarded entity .
- Any other person who is related to the reportable disregarded entity within the meaning of section 482 and the related regulations.
“Related party” does not include an LLC that files a consolidated federal income tax return with the reportable disregarded entity.
Configure the LLC’s Bookkeeping System
Because reportable disregarded entities must maintain books and records sufficient to establish the accuracy of their Form 5472 and the correct U.S. tax treatment of reportable transactions they should consult with a knowledgeable CPA to set up a bookkeeping system to track the required information.
Warning to Members of LLCs Owned Solely by a Foreign Person, Trust or Entity
If your LLC is a reportable disregarded entity these new reporting rules apply to you and your LLC. When you file the Form 5472 you must attach it to an IRS Form 1120, U.S. Corporation Income Tax Return, filed with the IRS. Attach Form 5472 to the reportable disregarded entity’s income tax return by the due date (including extensions) of the Form 1120. You cannot file Form 5472 separately. Note: A separate Form 5472 must be filed for each foreign or domestic related party with which the reportable disregarded entity had a reportable transaction during the tax year.
The Form 1120 for the reportable disregarded entity only contains the LLC’s name, address and U.S. tax ID number. This means that every LLC that is a reportable disregarded entity must have a federal employer id number aka an EIN. To get an EIN a “responsible party” must sign the IRS Form SS-4. A “responsible party” for a reportable disregarded entity is an entity or individual that manages, controls or directs the entity and the disposition of its money and assets. If your LLC that is a reportable disregarded entity that lacks an EIN you should immediately take steps to obtain an EIN because the lack of an EIN could cause the LLC to be unable to file timely its Form 5472 and therefore become liable for the $10,000/month penalty described below.
$25,000 Penalty for Failing to File the Form 5472 Timely
An LLC that is a reportable disregarded entity must file its Form 5472 and Form 1120 each year by the due date of the return or the LLC will be liable to pay the IRS a penalty of $25,000. If the IRS notifies the LLC that its Form 5472 is late the LLC must file the Form 5472 within 90 days of the notice or the LLC will be liable for an additional penalty of $25,000 plus $10,000 for every thirty days or portion thereof after the expiration of the 90 day notice period in which the Form 5472 is not filed. An incomplete or inaccurate Form 5472 is treated as a non-filing that causes the LLC to be subject to the late filing penalties.
The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.
Criminal penalties under Internal Revenue Code Sections 7203, 7206, and 7207 may also apply for failure to submit information or for filing false or fraudulent information.
When and Where To File
File Form 5472 as an attachment to the reporting LLC’s income tax return by the due date (including extensions) of that return. While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it is required to file a pro forma Form 1120 with Form 5472 attached by the due date (including extensions) of the return. The only information required to be completed on Form 1120 is the name and address of the foreign-owned U.S. DE and items B and E on the first page. The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements or, if none, the calendar year. “Foreign-owned U.S. DE” should be written across the top of Form 1120. File these forms by:
- Fax (300 DPI or higher) to 855-887-7737, or
- Mail to: Internal Revenue Service1973 Rulon White Blvd M/S 6112Attn: PIN UnitOgden, Utah 84403. Note. This special mailing address for a foreign-owned U.S. DE is different from the mailing addresses provided in the instructions for Form 1120.
Foreign persons who own a reportable disregarded entity should immediately take action that will enable the LLC to file its Form 5472 on or before the due date of the return. This action includes all of the following:
- Obtain an individual taxpayer identification number (ITIN) for the responsible party if the responsible party does not have a U.S. social security number, EIN or ITIN
- Obtain an EIN for the LLC if it does not have an EIN
- Make sure the LLC’s bookkeeping system is configured to track the information needed to prepare the IRS Form5472
- Hire a tax preparer who has the knowledge needed to prepare your Form 5472.
Hire an Experienced International Tax CPA to Prepare Your IRS Form 5472
If your LLC needs to file an IRS Form 5472 I recommend you hire international tax expert Douglas Kingston, CPA. Call him at 602-595-5885 or see his website.
- Form 5472 Filing Requirements tax chart – a flow chart created by international tax attorney Andrew Mitchell.
- T.D. 9796
- The IRS regulations that apply to reportable disregarded entities is 26 CFR 1.6038A-1
- foreign person
- section 6038A
- Form 5472
- Form 5472 Instructions
- individual taxpayer identification number