Many foreign nationals set up a U.S. Limited Liability Company (LLC) in the United States to hold real estate or conduct business. This is the most common, but not the only type, of U.S. disregarded entity subject to foreign information disclosure rules. This article will focus on LLCs since this type of structure is the most common. These single-member LLCs are typically "disregarded entities" for tax purposes. This means the IRS ignores the LLC itself and taxes only the owner.

For years, this structure came with minimal paperwork. That changed in 2017.

Federal regulations now require foreign-owned U.S. LLCs to file annual reports with the IRS. These reports must disclose transactions with related parties. The filing requirement applies even if your LLC earns no income and has no tax liability. For example, a vacation home in the United States owned in a single-member LLC.

Penalties for missing these filings are severe. The IRS can assess $25,000 per form per year for non-compliance.

This guide explains who must file, what information you must report, and how to stay compliant.

A single member LLC (SMLLC) can make an election to be treated as a U.S. corporation, the new regulations do not apply in this case as the entity would no longer be disregarded for tax purposes. It should be noted that Form 5472 may still be required to be prepared as part of the corporate income tax filing for an entity making this election.

Penalties for Non-Compliance

The penalties for Form 5472 violations are substantial.

Initial penalty: $25,000 per form for failure to file or filing an incomplete form. This penalty increased from $10,000 effective January 1, 2018.

Continuing failure: If you receive IRS notice of failure to file and don't correct it within 90 days, the IRS can assess an additional $25,000 for each 30-day period the failure continues. If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.

Substantially Incomplete: The IRS considers a form "substantially incomplete" the same as not filing at all. This means missing critical information can trigger the full penalty even if you submitted something.

Criminal penalties may also apply for failure to submit information or for filing false or fraudulent information.

What Is considered a U.S. Disregarded Entity?

A SMLLC is automatically classified as a disregarded entity, unless you elect otherwise. The term "disregarded" means the IRS treats the LLC as transparent for income tax purposes. Income and expenses flow directly to the owner's income tax return, if any.

If you're the sole owner of a US LLC, your LLC is likely a disregarded entity. This classification continues even if the LLC holds significant assets or conducts business activities.

Important distinction: While your LLC remains disregarded for income tax purposes, federal regulations now treat it as a separate corporation solely for international information reporting requirements under Internal Revenue Code Section 6038A. This informational reporting is separate from income tax reporting.

The 2017 Regulatory Change

On December 13, 2016, the Treasury Department issued final regulations under Internal Revenue Code Section 6038A. These regulations became effective for tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017.

The regulations impose new filing obligations on domestic disregarded entities wholly owned by foreign persons. For international information disclosure reporting purposes only, these LLCs must now be treated as domestic corporations under 6038A. They are otherwise disregarded for all other sections of the Internal Revenue Code.

How is a “foreign person” defined?

The term “foreign person” means any person who is not a United States person. This includes foreign individuals, foreign corporations, foreign partnerships, foreign trusts, and foreign estates. According to IRS guidance, a foreign person is anyone who is not a US citizen or resident, or any entity organized outside the United States.

Who Must File Form 5472?

You must file Form 5472 if all of these conditions apply:

You own 100% of a US LLC. The LLC must be a single-member entity. Multi-member LLCs taxed as partnerships have different rules.

You are a foreign person.

The LLC had reportable transactions with related parties. This includes transactions with you, the owner, as well as transactions with other entities you control. The related party can be U.S. or foreign. Reportable transactions include a broad range of activities between your LLC and related parties.

The filing requirement exists regardless of whether your LLC generates income, owes taxes, or conducts active business operations. For example, you own a vacation home for your family in an SMLLC. Generally, payment of an annual report fee to keep the LLC active would constitute a reportable transaction.

What Are Reportable Transactions?

Standard business transactions:

• Sales of goods or property
• Rental payments received or paid
• Royalties for intellectual property
• Interest on loans
• Service fees
• Commission payments
• Lease arrangements

Formation and ownership transactions:

• Capital contributions you make to the LLC
• Distributions the LLC makes to you
• Amounts connected to forming the LLC
• Payments related to dissolving the LLC
• Transfers of property into or out of the LLC

The IRS considers you, as the sole owner, a related party to your LLC. Money you put into the LLC or take out counts as a reportable transaction.

Example: You form a Florida LLC that holds rental property during the current year. During the year, you contributed $350,000 to purchase the property, and the LLC paid you $15,000 in rental profits. Both transactions must be reported on Form 5472.

Filing Requirements and Process

Foreign-owned U.S. disregarded entities must file Form 5472 attached to a pro forma Form 1120 (US Corporation Income Tax Return).

Pro forma Form 1120: This is a simplified version of the corporate tax return. You only need to complete basic identifying information including the LLC's name, address, and employer identification number. Write "Foreign-owned US DE" across the top. Most of the form remains blank.

Form 5472 itself requires detailed information about:

• The LLC's ownership structure
• Related parties the LLC dealt with during the year
• Types and amounts of transactions with each related party
• Additional questions about the LLC's operations

If your LLC had transactions with multiple related parties, you must file a separate Form 5472 for each one.

Obtaining an Employer Identification Number (EIN)

Your LLC needs an Employer Identification Number before you can complete the required filings. Many foreign-owned LLCs that previously had no filing requirements never obtained this number.

Apply for an EIN through the IRS by completing Form SS-4. While the IRS website has an online tool to apply for US residents, foreign applicants typically need to apply by fax or mail, which takes longer.

It is recommended to start this process well before the filing deadline. Without an EIN, you cannot complete the filing.

Filing Deadlines

Form 5472 is due on the same schedule as corporate tax returns, not the deadline for the owner of the LLC which may be different.

For calendar year LLCs (which includes most single-member LLCs owned by individuals), the deadline is April 15 following the end of the tax year. You can request a six-month extension to October 15 by filing Form 7004.

For example, a SMLLC owned by a foreign individual would extend the disregarded entity filing by April 15 and the personal or foreign corporation income tax return, if any, by June 15 each year.

Critical point: The extension applies only to the filing deadline, not to any taxes owed. Since foreign-owned disregarded entities typically don't owe corporate taxes through this filing, the extension is primarily about avoiding penalties for late Form 5472 submission.

Record-Keeping Requirements

Beyond annual filing, you must maintain detailed records documenting all reportable transactions. Your records must be:

• Permanent and retained as long as they may be relevant
• Accurate and complete
• Sufficient to establish income, deductions, and credits
• Available for IRS examination upon request

Types of records to maintain:

• Bank statements showing contributions and distributions
• Invoices and receipts for transactions
• Contracts and agreements with related parties
• Documentation of property transfers
• Loan agreements and repayment schedules
• Records showing the calculation of rents, royalties, or other payments