Non-US Persons Holding US Real Estate: Penalties For Failing To File Certain IRS Forms Are Increasing To $25,000

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Most non-US persons who are properly advised regarding US real estate ownership will structure their holdings to include some combination of US LLCs, non-US companies, non-US partnerships, non-US trusts and/or non-US foundations. Beginning in 2017, form-filing requirements and penalties were introduced for the use of single-member foreign-owned LLCs. The penalty associated with a failure to file the required forms will increase to $25,000 for filings due in 2019. Here is an overview of the requirements:

Single-Member Foreign Owned LLC’s and Form 5472

  • Issue: Beginning in 2017, single-member foreign-owned US LLCs are required to report to the IRS transactions with non-US owners and related parties.
  • Who Must File: All single-member foreign-owned LLCs which had “reportable transactions” in tax years beginning on or after January 1, 2017.
  • Forms:
    • IRS Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
    • IRS Form 1120 – U.S. Corporation Income Tax return (pro forma only)
  • Data Points: The manager of the LLC will need the following:
    • Name, address and Employer Identification Number of the LLC.
    • A description of the principal business activity and date of formation of the LLC.
    • Name and address of the foreign owner.
    • Tax residence(s) & Tax Identification Number(s) of the foreign owner.
    • Name and address of any Related Parties with which the LLC had Reportable Transactions.
    • Tax residence(s) & Tax Identification Number(s) of the Related Parties.
    • The value of Reportable Transactions.
  • Deadlines – the above-mentioned forms must be filed by the 15th day of the fourth month after the end of the reporting entity’s tax year. For the vast majority of these LLCs that will be April 15th.
  • Penalty – $10,000 per failure to file for Tax Year 2017 (due date in 2018), $25,000 per failure to file for Tax Year 2018 (due date in 2019)

Several elements of this process will require in-depth analysis:

  • Which Reportable Transaction definitions are applicable?
  • How does the definition of Related Parties apply to typical wealth planning structures?
  • Are there alternatives to Reportable Transactions which can minimize extraneous filing requirements?

If you haven’t already, we recommend you urgently discuss this requirement with your US advisor. Even though last year’s deadline has passed, there is still time to rectify the situation and minimize the exposure to the increased penalty.

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