Certain taxpayers need to acquire an Individual Taxpayer Identification Number (ITIN), for filing their income taxes. Generally speaking, ITINs are obtained and used in circumstances where a person who is filing income taxes, or is included on a tax return, may not be eligible for a Social Security number. The ITIN instead, serves as their identification number for income tax purposes.
In 2016, the IRS finalized new regulations pertaining to income tax recordkeeping and filing obligations for “U.S. disregarded entities,” such as single member LLCs, which are owned by a “non-US person.” The new regulations, which require the filing of Form 5472, have caused anxiety and confusion among foreign owners of U.S. LLC’s who, prior to the new regulations, had no U.S. tax filing obligations. The new regulations apply to tax year 2017.
Filing Form 5472
As stated above, beginning in tax year 2017, single-member U.S. LLC’s with foreign ownership will be required to file Form 5472 to report any transactions involving their foreign owners to the IRS. To properly complete the Form, the U.S. LLC will need to obtain an “Employer Identification Number” (EIN). In order to obtain an EIN, the entity must file a Form SS-4 “Application for Employer Identification Number.”
Form SS-4 requires the appointment of a “responsible party” for the entity. A responsible party is defined as “an individual who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.”
Here is where it can get a little complicated and confusing.
As the new regulations are written, it appears that the “responsible party” must have a U.S. social security number (SSN), or, if not, an individual taxpayer identification number (ITIN) to obtain the EIN necessary to file Form 5472.
However, the IRS is on record as stating that in circumstances where an EIN is required by federal law, (such as to file Form 5472), if the ITIN is for the sole purpose of obtaining the EIN, it is not necessary, and will not be issued for such sole purpose. The EIN will be issued without the ITIN.
This is particularly relevant, as most “responsible parties,” for foreign owned U.S. LLC’s are non-resident aliens (NRA), without an ITIN. However, taxpayers need to understand that these are new and evolving rules that have been designed to further transparency and information sharing. With that in mind, responsible parties, and their tax advisors, should closely monitor changes and developments with respect to new Form 5472, which may in the future oblige NRAs to obtain an ITIN for this filing requirement.
Another change under the new rules pertaining to filing Form 5472, is that capital infusions to LLCs are now considered “reportable transactions.”
How MBAF Can Help
Penalties for not properly filing Form 5472 can be steep. As you can see, complying with the new regulations can be quite confusing, particularly as many foreign-owned U.S. entities may not even be aware of their obligations under the new laws. We can review your entity’s structure, and provide guidance on whether you need to obtain an EIN, and how to properly file Form 5472.
Understanding the tax code and how it applies to Form 5472 can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our International Tax specialists, or call us at 1-800-239-1474.