Code § 6038A imposes reporting and recordkeeping requirements on domestic corporations that are at least 25% foreign-owned. They are required to file an annual return on Form 5472 with respect to each related party with which the reporting corporation has had any reportable transactions.
In newly issued regulations, the IRS will treat U.S. disregarded entities, such as single member LLCs not electing to be taxed as a corporation, as U.S. corporations for this purpose. Thus, their foreign owners will now have to file a Form 5472 if the U.S. disregarded entity has any reportable transactions with related persons and entities.
To add insult to injury, a number of exceptions to some of these obligations for smaller reporting corporations and for de minimis transactions will NOT apply to these entities.
Bear in mind that financial transactions between the owner of the U.S. disregarded entity and the entity itself will constitute reportable transactions and trigger this reporting. For example, the regulations provide this example:
(i) In year 1, W, a foreign corporation, forms and contributes assets to X, a domestic limited liability company that does not elect to be treated as a corporation under §301.7701-3(c) of this chapter. In year 2, W contributes funds to X. In year 3, X makes a payment to W. In year 4, X, in liquidation, distributes its assets to W.
(ii) In accordance with §301.7701-3(b)(1)(ii) of this chapter, X is disregarded as an entity separate from W. In accordance with §301.7701-2(c)(2)(vi) of this chapter, X is treated as an entity separate from W and classified as a domestic corporation for purposes of section 6038A. In accordance with paragraphs (a)(2) and (b)(3) of this section, each of the transactions in years 1 through 4 is a reportable transaction with respect to X. Therefore, X has a section 6038A reporting and record maintenance requirement for each of those years.
Failing to file results in a $10,000 penalty, so failures to file will be painful. And yes, there will be plenty of failures to file. First, it will be awhile until the new filing obligation is disseminated and absorbed by accountants performing international tax compliance, Second, for taxpayers using tax preparers who are not well-versed in international tax compliance, a lot of those preparers will not be knowledgeable of this filing requirement. Lastly, there will undoubtedly be owners of disregarded entities who will not use third party tax preparers and thus will oftentimes remain in the dark about these filing requirements.
The new rules apply to tax years of entities beginning on or after January 1, 2017 and ending on or after December 13 (31??), 2017.
T.D. 9796, 12/12/2016; Reg. § 1.6038A-1, Reg. § 1.6038A-2, Reg. § 301.7701-2