New Reporting Requirements for Foreign-Owned Disregarded Entities

The IRS recently finalized regulations requiring foreign persons with domestic disregarded entities to disclose to the IRS their beneficial owners. These disregarded entities, which include single-member limited liability companies (LLCs), are typically reported with an individual’s personal tax return, using Schedule C.

With these new rules, the IRS hopes to address an exception in the U.S. tax filing requirements that has allowed foreign non-resident aliens to avoid disclosure of certain types of investments in the U.S.

IRS expands Form 5472 filing requirement

Section 6038A of the Internal Revenue Code requires certain foreign-owned U.S. corporations to file a Form 5472 disclosing the identity of their foreign owners and reporting certain related-party transactions. The filing requirement applies where more than 25% of the voting power or value of all classes of stock of the corporation are owned by a single foreign owner. However, disregarded entities wholly-owned by foreign persons generally were not required to file any U.S. tax or information returns.

The new rules extend the Form 5472 filing requirement to all foreign-owned disregarded entities, even if they are not otherwise treated as corporations for U.S. tax purposes. Any such LLC will need to obtain U.S. ITINs and report the identity of its foreign owners to the IRS, even if it owns no U.S. assets and generates no income.

Penalties for non-compliance

Taxpayers who are subject to the Form 5472 reporting requirements and fail to comply face significant civil penalties and/or potential criminal sanctions under U.S. law. If failure to file continues for more than 90 days after notification by the IRS, a $10,000 penalty may be assessed. An additional $10,000 penalty may be assessed for every subsequent 30-day period if the failure to file continues.

The new regulations take effect for taxable years beginning after December 31, 2016. Contact me or another member of Kaufman Rossin’s international tax team with any questions about these new filing requirements.