The Treasury Department and the Internal Revenue Service recently finalized a notable shift in the way foreign-owned domestic disregarded entities are treated for tax purposes; changes which impose new reporting requirements with which compliance must be achieved. The tax professionals at Rosenberg Martin Greenberg can help provide entities impacted by these rules with legal counsel to stay on the right side of revenue authorities and to steer clear of any penalties applicable to those who disregard the new rules.

Basics of new reporting requirements

The new regulations pertaining to these entities take effect for tax years that began on or after January 1, 2017 and ended on or after December 13, 2017. Pursuant to the rules, a significant number of domestic disregarded entities that are foreign-owned and previously had no filing obligations will be subject to a series of documentation and reporting duties. They will need to secure an employer identification number (EIN) and also file Form 5472, known as an “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.”

History underlying disclosure changes

In the past, the so-called “check-the-box” entity designation rules have treated domestic businesses with single owners as either a corporation or as an entity disregarded as separate from its owner. Default rules dictated that single-owner entities were disregarded for federal tax purposes, unless a specific, formal election was made to be considered as a corporation. A disregarded entity is generally not required to to have an EIN and is not subject to federal tax filing requirements distinct from those of its owner. As such, no information or income return filing was necessary for disregarded entities owned by foreigners unless the entity or owner had earned U.S.-source income or was involved in a U.S. business or trade at some point during the relevant tax year.

In contrast, domestic corporations typically do have to file yearly income tax returns, and those with foreign ownership of at least 25% carry additional reporting and record keeping requirements. Under the new rules, foreign-owned disregarded entities are to be treated as domestic corporations in terms of records, reporting and other general compliance obligations. The reasoning behind this change is to facilitate greater transparency and to aid in the government’s fight against potential abuse of shell companies. Furthermore, the regulations are designed to support those included in 2016’s Bank Secrecy Act and other internationally recognized reporting standards.

Penalties for non-compliance

It should be noted that under the new regulations, the penalties for non-compliance can be quite steep and should be avoided wherever possible. Foreign persons who do not file Form 5472 when required to do so will face an initial penalty of $10,000, which will continue to build by another $10,000 for each additional 30-day period (following the first 90-days) for which compliance is not achieved. Clearly, advice and guidance from a team of knowledgeable tax professionals can prove invaluable for those attempting to navigate the new regulations for the very first time.

Comprehensive counsel for tax compliance and controversy concerns

The confluence of the new disclosure rules and existing reporting regulations can create significant difficulties for entities simply seeking to stay out of the crosshairs of the IRS. Fortunately, the tax attorneys of Rosenberg Martin Greenberg are ready and willing to examine each client’s unique situation to determine what needs to be done and when.

For a confidential review of your foreign bank account filings and other tax reporting matters, we invite you to contact us today.

Additional Resources:

  1. Internal Revenue Service, Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,
  2. Lexology, IRS Issues Broad Disclosure Rules for Foreign-Owned Disregarded U.S. Entities,