Form 5472 Requirements for Foreign-Owned U.S. LLCs

Who is required to file

Two categories of filers are most relevant to internationally connected clients. The first is a U.S. corporation that is 25 percent foreign-owned, meaning at least one direct or indirect foreign shareholder holds 25 percent or more of the total voting power or value of the stock. The second is a domestic disregarded entity — most commonly a single-member LLC — that is wholly owned, directly or indirectly, by a foreign person. A separate Form 5472 is filed for each related party with which the entity had a reportable transaction during the year.

The disregarded-entity rule that surprises people

A disregarded entity does not file its own income tax return. It has no separate federal income tax existence; its activity is reported by its owner. The section 6038A rules operate independently of that. For reporting purposes only, the LLC is treated as a corporation, is required to obtain an employer identification number, and is required to file. The filing does not create U.S. income tax liability and does not, by itself, mean the foreign owner has a U.S. tax obligation. It is an information return.

What counts as a reportable transaction

A reportable transaction is essentially any monetary or non-monetary exchange between the reporting entity and a related party. For a foreign-owned disregarded entity, the definition is broader than for a corporation and includes amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity, as well as contributions to and distributions from it.

• Capital contributed by the foreign owner to the LLC
• Distributions of cash or property from the LLC to the owner
• Loans between the LLC and the owner or another related party, and interest on them
• Sales, purchases, rents, royalties, commissions, and service fees with related parties
• Amounts paid in connection with forming or dissolving the entity

A common misunderstanding is that an LLC that never opened a bank account or never earned revenue has nothing to report. If the owner funded formation costs, or moved money in or out of the entity, those are reportable transactions. Owners should also keep in mind that these amounts must be supported by records sufficient to establish the accuracy of the return.

The pro-forma Form 1120

A foreign-owned disregarded entity does not file a complete corporate income tax return. It files a Form 1120 on which only the identifying information at the top of the form and the name and address entries are completed, with Form 5472 attached. The IRS refers to this as a pro-forma return, and it should be marked as directed in the Form 5472 instructions. Because the entity is not actually a corporation for income tax purposes, no income, deductions, or tax are reported on the pro-forma form.

Deadlines and how to file

The pro-forma Form 1120 with Form 5472 attached is due by the due date of the corporate return — generally the 15th day of the fourth month after the end of the entity's tax year, with an extension available by filing Form 7004. The IRS has specific instructions on how a pro-forma filing must be submitted, and those instructions have changed over time, so the current-year Form 5472 instructions should always be checked before filing. Twenty-five-percent foreign-owned U.S. corporations attach Form 5472 to their regular Form 1120.

Penalty exposure

The penalty for failing to file Form 5472, or for filing a substantially incomplete form, is significant and applies per form, per related party, per year. Additional penalties can accrue if the failure continues after the IRS issues a notice. Penalty relief may be available where the taxpayer can establish reasonable cause, but relief is fact-specific and is far more difficult to obtain than filing correctly in the first place. Because these penalties can be assessed automatically when a return is filed late, the practical consequence of missing a deadline is often a notice arriving before there is any opportunity to explain.

Mistakes we see most often

• Assuming that no income means no filing requirement
• Never obtaining an EIN for the LLC, which makes timely filing impossible
• Treating owner funding of the entity as something other than a reportable transaction
• Missing the requirement entirely because the state registered agent handles only state annual reports
• Filing a full corporate return by mistake rather than the pro-forma return
• Failing to maintain records that substantiate the reported amounts

Coordinating with the rest of your filings

Form 5472 rarely stands alone. Depending on the facts, a foreign owner may also have obligations relating to effectively connected income, withholding on payments, ownership of foreign corporations, or the disposition of U.S. real property interests. A structure that looks simple on a formation website often carries several distinct reporting regimes, and the correct approach is to map them together rather than one form at a time.

If a filing was missed

Late and unfiled information returns can usually be addressed, and doing so proactively is generally preferable to waiting for a notice. The right path depends on how many years are involved, whether tax is owed, and whether the IRS has already made contact. If you have received a notice, the response window is short, so the notice number and date on the letter should be provided when you contact our office.

Sources and official references

• IRS — About Form 5472
• IRS — Instructions for Form 5472
• IRS — About Form 1120