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$25,000 penalty for not reporting LLC with Foreign Owner(s)

What is a Single-Member LLC and what does it mean to be a Disregarded Entity?

For US tax purposes, a limited liability company (LLC), that has a single owner (Single Member LLC, or SMLLC) and is not classified as a corporation is generally disregarded as separate from its owner (a Disregarded Entity). That is to say that the economic activities of the SMLLC are attribute to the owner of the LLC for tax purposes, as if the LLC did not exist. Among other things, this concept basically allowed a foreigner to use a SMLLC to conduct certain economic activities in an “anonymous” manner using limited liability without triggering any more tax or information obligations that they would have had by doing the same things in their own name.

What are the typical structures affected?

Foreigners have traditionally used SMLLCs to do the following activities without having to declare anything in the United States:

  • Maintain bank accounts in the United States in the name of a company, yet with the same tax benefits as an individual investor.
  • Conduct international trading business using the United States as a hub.
  • Hold property with limited personal liability and without publishing the name of the final beneficiary in public records.
  • Legally compartmentalize a series of financial and/or real estate investments in different entities without creating a new taxpayer for each separate investment.
  • Being a subsidiary of a foreign company doing any of the activities previously mentioned, etc.

What information does the new rule require?

In preparation for exchanging more information with other countries, at the end of 2016 Congress revised the law so that SMLLCs were no longer considered transparent for purposes of reporting on their international transactions and foreign ownership. Beginning with the 2017 tax year, SMLLCs with foreign owners and reportable transactions needed to file a form 5472 and:

  1. Apply for a taxpayer number, for which it may be necessary that the ultimate beneficial owner list their taxpayer number (ITIN) or apply for one.
  2. Identify and report the LLC’s direct and indirect foreign owners, including the ultimate beneficial owner(s).
  3. Break down “reportable” transactions between the LLC and its owner(s) and/or other “related parties.”
  4. Report the total value of the LLC’s assets.
  5. Maintain books and records subject to audit.

Foreign-owned Corporations were already subject to filing form 5472, and the requirements for SMLLCs are basically the same with one important exception. The definition of “reportable transactions” was expanded for SMLLCs to include not only things such as payments and loans, but also capital contributions and distributions. Therefore, it can easily be that Form 5472 and the corresponding information will have to be presented by each SMLLC every year.

What are the consequences of non-compliance?

Without mentioning the criminal consequences for intentionally evading tax or information reporting obligations, the penalty for failing to file a Form 5472, even unintentionally, was increased from $10,000 for the 2017 fiscal year to $25,000 in 2018. The penalty is also applied whenever an incomplete, or late form is filed. Because a separate form is submitted for each “related party” in each year that there is a reportable transaction, the penalty can easily multiply. In addition, failure to maintain updated books to verify transactions constitutes an additional $25,000 penalty. Both penalties increase by $25,000 each month that non-compliance continues in case the breach is not resolved within 90 days after the tax authority sends the notice of a penalty. If the LLC does not pay the penalty, the tax lien could be extended to the assets of the LLC even if they are transferred to another owner and in some cases, be enforceable against the owners of the LLC.

How can you help me and my clients ensure that we comply with this new informative obligation?

  • Help correct any failure to file form 5472 for prior years.
  • Provide advice about what is a reportable transaction that triggers the need to declare.
  • Determine which individual is a “responsible party” for requesting a taxpayer number for the LLC and investigate if it is necessary that this individual also apply for a taxpayer number.
  • Help obtain taxpayer identification numbers when necessary.
  • Maintenance of the company’s books to avoid a $25,000 penalty per year.
  • Explore other more efficient legal alternatives to a SMLLC.

Get the help you and your clients deserve

Our multidisciplinary team of lawyers and accountants hopes to have the opportunity to help you achieve maximum tax efficiency and legal advantage. Contact us at 305-444-7662 or Ed@AristaLaw.com to schedule a confidential consultation in person, over the phone or via videoconference.