How to File Forms 5472 and 1120 To Avoid A $25,000 Fine? Explained In Detail With Filing Requirements For Foreign-Owned Single-Member LLCs

If the LLC is at least 25% owned by a foreign person or entity, they have to file some forms. Namely, they’ll need to file Form 5472 and pro forma Form 1120. But the question here is How to File Forms 5472 and 1120?

It might sound complicated, but don’t Panic. In this post, we will discuss the same in detail. So let’s begin.

What Is Form 5472 Used For?

Form 5472 is used by the IRS to help track certain foreign-owned corporations or LLCs that do business in the United States. The form is required to be filed if the company has more than 25% foreign ownership, and it provides information on the company’s finances and activities.

Form 5472 is an important tool for the IRS in ensuring that foreign-owned companies are complying with U.S. tax laws. By requiring companies to provide detailed information on their finances and activities, the IRS is able to better monitor these businesses and ensure that they are paying their fair share of taxes.

While Form 5472 can be a bit of a hassle for companies to file, it is an important part of ensuring that foreign-owned businesses are following U.S. tax laws.

Activities, according to the IRS, include:

  • Any type of transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S.and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year; or
  • Any transaction or group of transactions listed in Part IV, if:
  • Any part of the consideration paid or received was not monetary consideration, or
  • Less than full consideration was paid or received.

Transactions with a U.S.-related party, however, are not required to be specifically identified in Parts IV and VI.

What is Form 1120 used for?

According to the IRS, Form 1120 is used for domestic corporations to:

  • Report their income, gains, losses, deductions, and credits.
  • Figure their income tax liability.

This is an LLC’s main way to communicate their business performance and figure out their tax liability with the IRS. Form 1120 also has several different types of organization-specific forms including:

  • 1120-C: cooperative associations, such as farmers’ cooperatives
  • 1120-F: foreign corporations
  • 1120-H: condominium management, residential real estate management, timeshare association that elects to be treated as a homeowners association
  • 1120-L: life insurance companies
  • 1120-POL: political organizations
  • 1120-S: S corporations

How to File Forms 5472 and 1120?

It is important that Form 5472 is filed timely and accurately to avoid large penalty exposure. Unless you have a reasonable cause, if you fail to file Form 5472 or file an incomplete or incorrect return, a penalty of $25,000 may be imposed on the corporation reporting.

An extra $25,000 penalty may be enforced when the entity reporting does not file Form 5472 after it has been modified by the IRS.

Below explained are some of the steps that you have to follow to file from File Forms 5472 and 1120.

STEP 1: Get an Employee Identification Number

In order to file Form 5472, you have to apply for a U.S. Employer Identification Number or EIN. Just like any other company, the owner of a limited liability company must register for an EIN by preparing and filing Form SS-4. That SS-4 application form must be signed by what the IRS calls a Responsible Party. According to the IRS, a Responsible Party is an individual who has some level of control over an LLC.

There are three ways you can submit Form SS-4:

Online: If a foreign LLC’s registered agent has an office in the United States, they can apply for an EIN online. However, applying is only an option for the Responsible Party signing Form SS-4 if they have a valid U.S. taxpayer identification number (TTIN).

Phone: Only LLCs that do not have a residence, place of business, or office in the U.S. may apply for an EIN over the phone. That means that most foreign-owned LLCs will not be able to, considering that the certified agent is in the U.S.

Mail: Any foreign-owned LLC may submit Form SS-4 to the IRS. Using this service, the LLC will get its EIN back in about two weeks.

If your residence, place of business, office, or agency is located in the U.S., mail Form SS-4 to: 

  • Internal Revenue Service
  • Attn: EIN Operation
  • Cincinnati, OH 45999

 If you have no residence, place of business, office, or agency in the U.S., mail Form SS-4 to: 

  • Internal Revenue Service
  • Attn: EIN International Operation
  • Cincinnati, OH 45999

Fax: Faxing the application is a much faster route than mail. You can usually receive an EIN by fax within four business days. If after four business days you still haven’t gotten your EIN, then you may call the IRS to obtain the number.

If your residence, place of business, office, or agency is located in the U.S., fax Form SS-4 to: Fax: (855) 641-6935

If you have no residence, place of business, office, or agency in any state, fax Form SS-4 to: Fax: (855) 215-1627 (within the U.S.), or Fax: (304) 707-9471 (outside the U.S.)

STEP 2: Fill out Form 5472

Form 5472 can seem confusing and complicated. Here’s what to put where:

Part I: Information about the LLC

  • All reporting LLCs must complete Part I of Form 5472. This covers the name, address, and EIN.
  • The address can be a foreign address. (It will almost certainly be the same address you used on Form SS-4.)
  • The address should be somewhere the IRS can send notices to the responsible party, a nominee, or someone affiliated with the LLC.
  • You must also provide a description of the LLC’s business activity and corresponding code. (You can find those in the instructions for Form 1120.)
    • Typically, a foreign-owned LLC that is engaged in e-commerce activities such as amazon FBA, Dropshipping, eBay, Shopify sales, etc. may use the “Electronic Shopping & Mail-Order Houses” description and code 454110.
  • Check Line 3 of Part I to show that your LLC is a foreign-owned disregarded entity.
  • Lines 1F to 1L of Part I are relevant to your LLC. Check box “1j” if this is the first year for which the LLC is filing Form 5472.
  • On the issue of LLC residency, the IRS released International Technical Assistance (ITA) 200019042, which clarified that a single-owner LLC is a disregarded entity separate from its owner for federal income tax purposes, the LLC is not a person for purposes of U.S income tax treaties. The IRS further stated that the income of the single-owner LLC is taxable in the hands of the single owner, and not in the hands of the LLC. The LLC is not liable to tax within the meaning of U.S income tax treaties, and even under domestic law. Therefore an LLC owned by a foreign person cannot certify that the LLC is a resident of the United States.
  • Also, Make sure to review the instructions and fill out any lines that do apply, especially if your LLC has had transactions with multiple Related Parties.

Part II: Information about the Foreign Owner

Now you’ll need to complete Part II with the name and address of the LLC’s single foreign owner. This foreign owner may be:

  • an individual who is not a citizen or resident of the United States,
  • a company, association, partnership, or corporation that isn’t created or organized in the U.S., or
  • a foreign estate or foreign trust.

If you don’t have a U.S. Tax Identification Number, you don’t have to enter one. However, the form may include your foreign Tax Identification Number. If you don’t have even a foreign Tax Identification Number, then just put “none” or “n/a” on Line 1(b)(3). But that’s only if you really don’t have one at all.

If you enter anything other than a U.S. Tax Identification Number, you’ll also need to enter a Reference Identification Number. That’s a number you come up with yourself. You don’t have to apply to the IRS for it.

This Reference Identification Number must:

  • be 50 characters or less, and
  • include only letters or numbers, no special characters or spaces.

You’ll have to use the Reference Identification Number every year, so be sure to write it down somewhere for next year

Part III: Information about the “Related Party”

Next up, you have to complete Part III. Part III deals with the “Related Party” the LLC had reportable transactions with during the tax year. In most cases, that will be the foreign owner. Related Party can also be a U.S person, the completion of part III is mandatory.

However, the definition of Related Party is broad. For example:

  • If a single member LLC is owned by a foreign company, a Related Party might be another company in the same controlled group.
  • If an LLC is owned by a foreign trust, it might be the trust’s beneficiary and settlor.
  • If an LLC is owned by a foreign individual, Responsible Parties might even include members of that individual’s family.

With that in mind, here’s what you have to do:

  • Enter the name and address of the Related Party (Whether domestic or foreign) the LLC had reportable transactions with during the tax year, including the foreign owner already reported in Part II. Again, if the Related Party doesn’t have a U.S. Tax Identification Number, you’ll need to enter a Reference Identification Number.
  • If the Related Party is an individual, you can ignore any references to business activity.
  • Part III also requires the name of the country under whose laws the Related Party files income tax returns as a resident.

Note: You must file a separate Form 5472 for every Related Party the LLC had a reportable transaction.

Parts IV, V, and VI: Information about Reportable Transactions

Part IV is where you’ll list primary transactions.

Note: Most transactions listed in Part IV may not be applicable to a foreign-owned disregarded entity. Next, you’ll have to check a box in Part V if the LLC has had any transactions with its owner or other Related Parties that are not listed in Part IV.

Part V requests for ANY amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity, including contributions to and distributions from the LLC.

Part VI asks whether the LLC conducted any less-than-full or non-monetary transactions. If the answer is yes, you’ll have to detail those in an attached statement.

Part VII: Additional Information

Last, you’ll have to fill out Part VII. For the most part, you’ll just be checking “no,” but it’s important, nonetheless.

STEP 3: Fill out Pro Forma Form 1120

Compared with Form 5472, pro forma Form 1120 is a piece of cake. Because you’re a foreign-owned LLC, the IRS lets you fill out Form 1120 with reduced information.

In fact, the only information they require on Form 1120 is:

  • the name & address of the foreign-owned disregarded entity,
  • the Employer Identification Number (EIN), and
  • checkboxes for initial returns, final returns, or name & address changes

Once you’ve entered that information in, write “Foreign-owned U.S. DE” across the top of the form. Now it’s time to send the forms in.

A signature is required, at the bottom of Form 1120 after the perjury statement. Without your signature, the return is not an official document and may not be processed.

STEP 4: Mail or Fax Forms 5472 and 1120 to the IRS.

Just attach your completed pro forma Form 1120 to Form 5472. Then, mail or Fax it in. If you decide to mail the forms, the standard Form 1120 mailing addresses won’t work. You can find the correct address in the filing instructions for Form 5472.

Note: Those addresses and Fax Numbers can change from time to time, so remember to check the most updated instructions each year. And that’s it! Congratulations, you’ve filed the correct forms for your foreign-owned LLC.

Conclusion On How to File Forms 5472 and 1120

So this is How you can File Forms 5472 and 1120. I know this stuff may sound confusing or you simply don t have time, but every year countless foreigners rely on preparing their LLC statements for sole-member firms. And when thinking about penalties for getting it wrong, it s worth the effort. If you still have any queries, I would be happy to help answer them.

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