This article is for “non-resident aliens” who own a US LLC (either directly or through a non-US trust or non-US company). You’re a non-resident alien if you’re NOT any of the following:
- A US citizen,
- A US permanent resident (i.e., a “green card holder”), or
- Someone who’s lived in the US long enough to pass the “substantial presence test.”
Click here to read about the general US tax consequences for non-US entrepreneurs and the reasons to operate through a US LLC.
New Filing Requirement
Starting for the first time in 2018, non-US owners of a US LLC will need to file IRS Form 5472. Not filing the 5472 (or completing it incorrectly) has huge negative consequences–the IRS could impose a $10,000 fine.
This article discusses the new 5472 filing requirement in detail.
The worldwide tax reporting web
The US is just a little paranoid that Americans are hiding assets outside the US. In fact, the IRS estimates that the amount of money hidden offshore by Americans is into the trillions.
So, the US has created a number of reporting regimes to combat this offshore tax evasion, most notably the Foreign Account Tax Compliance Act (or “FATCA”). FATCA places severe reporting burdens on non-US financial institutions and, in certain situations, on non-US governments as well.
Under FATCA, many non-US governments are required to help non-US financial institutions report Americans with accounts back to the IRS.
Big hole in the web
FATCA is pretty much a one-way street at this point–other countries are required to report information to the US, but the US isn’t really required to report information to other countries.
So, many non-US entrepreneurs and investors have been able to essentially use the US as a tax haven. Many states (like Wyoming) don’t have a public register of members of LLCs, and a non-US person is only required to file a US tax return in limited circumstances. So, before the 5472 filing requirement, it was very possible for a non-US person to hold substantial assets through a US LLC with no paperwork required to be reported to anyone.
In an effort to play nice with other governments (and to get them to keep complying with FATCA), the IRS now requires non-US owners of US LLCs to submit the 5472 each year. The exact back-office procedures here are of course not publicized–it’s not clear whether the IRS will automatically send information reported on the 5472 to other countries, or whether that information will simply be made available for other countries to search through.
But it shouldn’t be any surprise that hiding money and not paying tax is an increasingly difficult thing to do. For non-US investors and entrepreneurs with nothing to hide, the 5472 is nothing to be afraid of. Simply being required to file this form doesn’t negate the many substantial benefits of operating through an LLC.
When is the 5472 required?
Before 2018, the 5472 was only required to be filed by a US corporation that has at least one 25% non-US owner. In 2018, the requirement to file the 5472 has been expanded so that LLCs with at least one 25% non-US owner are also required to file.
Then, an LLC is only required to file the 5472 if it has engaged in a “reportable transaction.” On the surface, this would seem to narrow down the circumstances in which the 5472 will actually be required, but it doesn’t really because of how broad the term “reportable transaction” is defined.
The rules provide that any movement of property between the LLC and its owner is a reportable transaction. For example, if the owner of the LLC opens a bank account in the name of the LLC and transfers funds to that bank account, the LLC has engaged in a reportable transaction. Even more broadly than that–if the LLC sells on Amazon and uses a service like Payoneer to receive funds and transmit those funds to the owner of the LLC, the LLC has also engaged in a reportable transaction.
So, unless the LLC has just been completely dormant with no activity at all, it will be required to file a 5472. Even in the case of a completely dormant LLC, I believe it’s a good idea to still file a 5472 out of an abundance of caution. There’s no sense in taking any risk at all of potentially being subjection to a $10,000 fine. And, if the LLC is not dormant in a later year and files a 5472, it may look a little strange if it didn’t file one in a previous year.
The 5472 was previously only required to be filed by US corporations. A US corporation is required to file a US tax return on IRS Form 1120. Since neither an LLC nor its non-US owner will typically be required to file a US tax return, the IRS needed to change the 5472 to accommodate this new situation.
Unfortunately, the IRS took the lazy way out here. Instead of substantially changing the 5472 so it can be filed separately, the IRS required the form to be attached to an 1120 that’s used essentially as a “cover sheet.” The 1120 only needs to be partially completed–it only needs to include basic identifying information, not income and deduction numbers like would be on a full-blown tax return.
Instead of these numbers, the only financial information reported on the 5472 is as follows:
- The value of the LLC’s assets as of 12/31/2017;
- The amount of money that moved from the non-US owner to the LLC during 2017; and
- The amount of money that moved from the LLC to the non-US owner during 2017.
Finally, in addition to other standard identifying information, the 5472 must include a non-US taxpayer identification number for the 25% owner of the LLC.
Then, to file the 5472, you can either mail it in or fax it to the IRS. (Yes, the IRS still uses fax machines . . .).
Want some help?
I’m preparing a ton of 5472s for my clients. I can prepare one for your LLC as well.
Click here if you’d like to discuss the details.
If you have other questions about how the 5472 works (or more generally about investing or doing business in the US), click here to book a consultation.