The Form 5472 Penalty Abatement for Late-Filing Explained

How Form 5472 Prevents Nonresidents from Undetected SMLLCs

Form 5472

Despite the fact that the United States Tax Authorities prides itself on enforcing international compliance for all US person individuals, entities trusts, and estates that have US tax and reporting requirements — on a global scale, the United States is actually known as one of the biggest tax havens around. Many expatriates go this route once they are no longer US persons. Across the globe, foreign taxpayers who want to try to go undetected create ‘overseas trusts” from abroad, in the United States (in states such as Wyoming and Nevada) — and can usually get by, undetected. In order to try to foreigners from using US corporations and limited liability companies as tax havens, the Internal Revenue Service requires certain foreign-owned US corporations that are engaged in a U.S. trade or business to file an annual Form 5472. The Form is complicated — and so a common question nonresidents may have is whether a foreign person who creates a US limited liability company that is a flow-through such as an LLC or SMLLC (Single-Member LLC) is it also required to file an annual Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business or a Foreign Corporation Engaged in a U.S. Trade or Business).

Single Member LLC

A single-member limited liability company (which can include both spouses in a Community Property state) is it very common type of entity. It allows taxpayers to have a formalized legal entity in this state they reside or operate a business for protection (such as an SMLLC used to own rental property) — well from a tax perspective, the default position is that the entity is disregarded and therefore the taxpayer does not have to file a complicated tax form, and can instead include the income and expenses on a Schedule C as part of the 1040 tax return.

Foreign-Owned Single Member LLC

As you can imagine, a foreigner would be able to (pretty easily) manipulate the US tax system in order to own a foreign-owned single-member LLC and then avoid having to report or file any paperwork under the position that it is flowthrough and therefore all the income flows through back to the country of residence — in which the taxpayer may have no tax or reporting requirement. Of course, if there is FDAP or ECI, that may not be true and US Tax would be required.

Who is a Reporting Corporation for Form 5472?

The US government is aware of these loopholes, and therefore in an attempt to close the loophole requires reporting on IRS Form 5472 Reporting for disregarded entities just as it would a US corporation that is not disregarded.  Technically, Form 5472 is the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

What is a 5472 Reporting Corporation?

• • • A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE)), or •

    • A foreign corporation engaged in a trade or business within the United States.

Therefore, if the US disregarded entity is considered foreign-owned, then Form 5472 would be required by the foreign person.

Foreign-Owned US Disregarded Entity

Foreign-owned U.S. DE as provided by Form 5472

• • • A foreign-owned U.S. DE is a domestic DE that is wholly owned by a foreign person

    • For tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017, a foreign-owned U.S. DE is treated as an entity separate from its owner and classified as a corporation for the limited purposes of the requirements under section 6038A that apply to 25% foreign-owned domestic corporations.

    • See the final regulations at IRS

Finalized Regulation as Reference by Form 5472

• • • (vi) Special rule for reporting under section 6038A –

    • (A) In general. An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A if – (1) The entity is a domestic entity; and (2) One foreign person has direct or indirect sole ownership of the entity.

What does this Mean?

The updated regulation refers to the fact that in accordance with Internal Revenue Code section 6038A — which refers to information with respect to certain foreign-owned corporations — when a disregarded entity is owned by a foreign person — with direct or indirect sole ownership of the entity — it will be considered a corporation perform 5472/6038A reporting purposes.

• • • (B) Definitions –

      • (1) Indirect sole ownership. For purposes of paragraph (c)(2)(vi)(A)(2) of this section, indirect sole ownership means ownership by one person entirely through one or more other entities disregarded as entities separate from their owners or through one or more grantor trusts, regardless of whether any such disregarded entity or grantor trust is domestic or foreign.

      • (2) Entity disregarded as separate from its owner. For purposes of paragraph (c)(2)(vi)(B)(1) of this section, an entity disregarded as an entity separate from its owner is an entity described in paragraph (c)(2)(i) of this section.

      • (3) Grantor trust. For purposes of paragraph (c)(2)(vi)(B)(1) of this section, a grantor trust is any portion of a trust that is treated as owned by the grantor or another person under subpart E of subchapter J of chapter 1 of the Code.

    • (C) Taxable year.

      • The taxable year of an entity classified as a corporation for section 6038A purposes pursuant to paragraph (c)(2)(vi)(A) of this section is – (1) The same as the taxable year of the foreign person described in paragraph (c)(2)(vi)(A)(2) of this section, if that foreign person has a U.S. income tax or information return filing obligation for its taxable year; or (2) The calendar year, if paragraph (c)(2)(vi)(C)(1) of this section does not apply, unless otherwise provided in forms, instructions, or published guidance.

Filing Rules for Foreign-owned U.S. DEs.

• • • While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it will now be 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 Service 1973 Rulon White Blvd M/S 6112 Attn: PIN Unit Ogden, Utah 84201

    • Foreign-owned U.S. DEs are required to use the special mailing address, earlier

    • These filers do not use the mailing addresses provided in the instructions for Form 1120. Extension of time to file. A foreign-owned U.S. DE required to file Form 5472 can request an extension of time to file by filing Form 7004. The DE must file Form 7004 by the regular due date of the return.

    • Because the Form 5472 of a DE must be attached to a pro forma Form 1120, the code for Form 1120 should be entered on Form 7004, Part I, line 1. “Foreign-owned U.S. DE” should be written across the top of Form 7004. The DE must fax or mail the Form 7004 to the fax number or mailing address identified, earlier, by the due date (excluding extensions) of the return. For these entities, do not use the regular filing address listed in the Instructions for Form 7004. For further general information, see the Instructions for Form 7004.

Electronic Filing of Form 5472

• • • If you file your income tax return electronically, see the instructions for your income tax return for general information about electronic filing. If you are a foreign-owned U.S. DE, you cannot file Form 5472 electronically. See Foreign-owned U.S. DEs under When and Where To File, earlier, for acceptable methods of filing.

Lines 1b(3), 2b(3), 3b(3), and 4b(3)

A foreign-owned U.S. DE must enter an FTIN, if any, for each direct and ultimate foreign owner listed in Part II. If a foreign-owned U.S. DE has, as a direct owner, a foreign DE, report that foreign DE as the direct owner.

• • • The FTIN should be used consistently on an annual basis when filing Form 5472, as an EIN or reference ID number would be used. If you do not have an FTIN, enter “None” or “N/A” in the FTIN block. If you have a U.S. identifying number and/or reference ID number, you can enter it in the appropriate block, as discussed, earlier.

    • Filers of Form 5472, other than foreign-owned U.S. DEs, can enter an FTIN on these lines. However, they also must enter a U.S. identifying number or reference ID number on lines 1b(1)–4b(1) or 1b(2)–4b(2), respectively. If you are not a foreign-owned U.S. DE, and do not have an FTIN, leave the block blank. Lines 3a–3e and lines 4a–4e.

    • Attach an explanation of the attribution of ownership. See Rev. Proc. 91-55, and Regulations section 1.6038A-1(e).

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