Form 5472
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Form 5472: Special Reporting Requirements for Nonresidents
As we have discussed above, for income tax purposes, a single-member LLC formed in the U.S. by a nonresident alien is classified as a disregarded entity. That means all of the activities of the LLC are reported on your Form 1040NR (Schedule C if a business or Schedule E if rental property), and there is no separate corporate form to file.
However, for one section of the Internal Revenue Code, if a foreign person has direct or indirect sole ownership of the LLC (that's you), it is treated as a separate entity and classified as a U.S. corporation. This is only for Section 6038A of the Code, which specifies special reporting requirements for a U.S. corporation that is owned more than 25% by a "foreign person". The term "foreign person" includes a nonresident alien individual and generally any entity that is not formed in the United States. Additionally, it also includes any individual who is a citizen of any possession of the United States, but not a citizen or resident of the United States (IRC Section 6038A(c)(3)).
You can have indirect sole ownership of an LLC if your LLC is owned entirely through one or more other disregarded entities owned by you, regardless of whether the disregarded entity was formed within or outside the United States (Reg. Sec. 301.7701-2(c)(2)(vi)). So, for example, if you form an LLC as the sole owner, and that LLC forms another LLC as the sole owner, both LLCs are subject to the reporting requirements of Section 6038A, because they are both either directly or indirectly owned by you.
Reporting Requirements of Section 6038A
The reporting requirements of Section 6038A change nothing concerning how you report the activities of your LLC for income tax purposes. The LLC is still disregarded when it comes time to report its income and expenses on your Form 1040NR. The classification as a separate corporation only applies to satisfy the requirements of IRC Section 6038A.
In general, this section requires you to:
- Furnish the name, principal place of business, nature of business, and country of residence for each person that is a related party to the reporting LLC during its taxable year, if that person had any transaction with the LLC
- Describe how such a related party is related to the LLC
- Provide a description of the transactions (deemed "reportable transactions" in the instructions to Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)) between each related party and the LLC (IRC Sec. 6038A(b)).
The two critical terms to understand here are "related party" and "transaction" (or "reportable transaction"), which have very specific definitions under IRC Section 6038A.
Form 5472 Filing Procedures
Although a single-member nonresident LLC has no separate income tax return filing requirements, Form 5472 is required to be attached to a pro forma Form 1120 by the Form 1120 due date, even if there are no business activities requiring the filing of an income tax return.
"Foreign-Owned U.S. DE" should be written across the top of Form 1120. To file, the forms can be faxed to the IRS, with a cover letter, to 1.855.887.7737.
The due date for a calendar year corporation is April 15 of the following year, however, the due date can be extended to October 15 using Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns).
In addition to filing Form 5472, you must maintain records to determine the correct treatment of transactions with related parties. Failure to file Form 5472/1120 by the due date, or to maintain proper records, incurs a penalty of $25,000, unless you have a valid reason for not doing so (IRC Section 6038A(d)).
Filing Late
The protections afforded taxpayers who file late FBARs or delinquent international information returns (see Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets) are not available to nonresident aliens who file Form 5472/1120 late. These procedures are for U.S. taxpayers who have undisclosed foreign accounts, rather than nonresidents with undisclosed LLCs and unpaid taxes.
However, IRC Sec. 6038A(d)(3) provides that the penalty for late filing or maintaining records will not apply if "reasonable cause" existed at the time of the requirements.
What is Reasonable Cause?
According to the IRS:
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience and knowledge of the taxpayer. Isolated computational or transcriptional errors generally are not inconsistent with reasonable cause and good faith. Reliance upon an information return or on the advice of a professional (such as an attorney or accountant) does not necessarily demonstrate reasonable cause and good faith. Similarly, reasonable cause and good faith is not necessarily indicated by reliance on facts that, unknown to the taxpayer, are incorrect.
Treas. Reg. Sec. 1.6038A-4(b)(2)(iii).
More importantly:
The District Director shall apply the reasonable cause exception liberally in the case of a small corporation that had no knowledge of the requirements imposed by section 6038A; has limited presence in and contact with the United States; and promptly and fully complies with all requests by the District Director to file Form 5472, and to furnish books, records, or other materials relevant to the reportable transaction. A small corporation is a corporation whose gross receipts for a taxable year are $20,000,000 or less.
Treas. Reg. Sec. 1.6038A-4(b)(2)(ii).
Therefore, if you are a nonresident alien LLC owner reading this after the tax deadline and have been overtaken with a sense of panic, there's still hope! You should file a late return as soon as possible, and get our help to write a reasonable cause statement to attach. We have been very successful in helping clients avoid the $25,000 late filing penalty.
For any further clarification or questions, please be sure to visit our FAQ page or schedule a free 30-minute confidential meeting with us to discuss your situation.
Let Us Help!
The best way to look at this is to consider any individual or entity that is even remotely connected to you to be a related party to your LLC and talk to us about the activities of that person. We can help determine whether there are transactions that must be reported on Form 5472.