Non-US Owners of a Single-Member US LLC: Time to File IRS Form 5472
When you sell into the US, there are lots of good reasons to operate through a US limited liability company (an “LLC”). Doing so now requires a little more paperwork than in previous years.
This article is for “non-resident aliens” who own 100% of 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 has spent enough time in the US 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.
US Tax Filing Requirement for US LLCs
US LLCs that are owned by a single non-resident alien (or by some other type of non-US person, such as a non-US corporation) are required to file IRS Form 5472. Not filing the 5472 (or completing it incorrectly) can have huge negative consequences–the IRS could impose a $25,000 fine.
This article discusses the 5472 filing requirement in detail.
The Worldwide Tax Reporting Web
The story here starts with reporting requirements going in the other direction–reporting related to non-US assets owned by US persons. 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 governments–they are generally required to 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.
If an LLC has more than one owner, then it is classified as a partnership for US tax purposes unless it elects to be classified as a corporation. A partnership is required to file IRS Form 1065, and a corporation is required to file IRS Form 1120.
So, many non-US entrepreneurs and investors have been able to use the US as a tax haven by taking advantage of the lack of reporting for a single-member LLC. 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 single-member 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 comply with FATCA), the IRS requires US LLCs with a single non-US owner to submit IRS Form 5472 each year. The tax year for US tax purposes is the calendar year, and the 5472 is generally due before April 15th of the following year. An LLC can file an extension using IRS Form 7004.
It is not clear what the IRS does with an IRS Form 5472–whether the IRS automatically sends 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 generally filed only by a US corporation in certain circumstances. In 2018, the requirement to file the 5472 was expanded so that LLCs with a single non-US owner are also required to file.
A single-member 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 cash or other property between the LLC and its single 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 $25,000 fine. And, if the LLC is not dormant in a later year and files a 5472, the overall reporting picture is more complete if the LLC has simply filed a 5472 in every year of its existence.
Filing Procedure
Before 2018, the 5472 was filed simply as an attachment to the IRS Form 1120 that a US corporation is already required to file. So, the 5472 isn’t really designed to be filed alone–for example, there’s no spot on the 5472 itself to actually sign the form.
When the 5472 requirement was expanded to single-member LLCs in 2018, the IRS really should have just come up with a new form (here’s a crazy idea–it could have been called IRS Form 5473 . . .). Unfortunately, the IRS took the lazy way out–the IRS simply required the 5472 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 the end of the reporting year;
- The amount of money that moved from the non-US owner to the LLC during the reporting year; and
- The amount of money that moved from the LLC to the non-US owner during the reporting year.
Finally, in addition to other standard identifying information, the 5472 must include a non-US taxpayer identification number for the single member of the LLC. Note that the single member is not required to obtain a US tax identification number (i.e., an “Individual Taxpayer Identification Number” or “ITIN”); a non-US person is required to get an ITIN only if they need to file an actual US tax return (such as the IRS Form 1040NR).
Then, to file the 5472, you either mail it in or fax it to the IRS. (Yes, the IRS still uses fax machines . . .).