The IRS finalized regulations in December of 2016 that require all foreign owners of single member LLCs to file an annual information return with the IRS. A single member LLC is an LLC owned by one person or entity, or by a husband and wife. Until now, the ownership of the LLC itself did not have to report.
Many foreigners have created a U.S. LLC themselves online or through an inexperienced advisor and will not know about this new reporting requirement. Failure to file this annual return results in penalties for foreign investors using LLCs to hold investments or conduct business in the United States or abroad. If a foreign person fails to file Form 5472 when required, the initial penalty is US$10,000. This penalty is increased by US$10,000 for each 30-day period (after an initial 90-day period) for which the failure persists.
What are the choices for a foreigner now?
- Find out if you or your business entity is classified as a foreign owner. Immigration or securities law status are not the same as the tax definition;
- Do nothing and get penalized – you will get caught – be warned; or
- Report on Form 5472 your ownership of the LLC – get a tax ID from the IRS and pay taxes; or
- Do some planning ASAP – so that the LLC is reported but with a tax efficient structure.