Form 5472 for a foreign owned LLC: the filing that starts at $25,000 before any tax exists

I told a founder on a call in March that her US LLC had nothing to file. No US customers, no US staff, no US income, so nothing. She wrote that down in front of me. I repeated it in writing 3 days later to somebody else, and I have thought about both answers more than is reasonable in the months since, because the number attached to being wrong here is 25,000 dollars and it lands before any tax exists.

I had assumed that the tax and the paperwork travel together. They do not travel together at all. The sentence I was leaning on is true and I can still defend it: a foreign owned single member LLC has no federal income tax return requirement. Out of that true sentence I drew a second one that nobody at the IRS has ever written, which is that it therefore files nothing at all. The disclosure lives in a different part of the code from the tax, it does not care what the company earned, and it is priced as a flat penalty instead of a percentage of anything.

If you formed a US LLC this year and you are not a US person, you should assume the year reports. That is the short version and the rest of this letter is why. This is the corrected version, and it is the part of US paperwork that catches foreign owners more often than any bank rule I write about. What follows is who Form 5472 actually reaches, what the arithmetic looks like when the page is missing, and the parts of it I could not establish.

Do I need to file Form 5472 if the LLC earned nothing

Final regulations under section 6038A treat a foreign owned US disregarded entity as if it were a domestic corporation for reporting. The instruction to Form 5472 puts it in one line that I had read and not absorbed: the entity has no income tax return filing requirement, and it will now be required to file a pro forma Form 1120 with Form 5472 attached, by the due date of that Form 1120 including extensions.

Do not read pro forma as optional. It means most of the 1120 stays blank. The instruction names exactly what goes on it, which is the name and address of the entity plus items B and E on the first page. Everything else on that return is left alone. The tax year of the LLC follows the tax year its owner uses for US filing, and where the owner has none, it is the calendar year.

So the object being filed is not a tax return in any useful sense. It is a cover page with 2 boxes on it and an information form stapled behind it, and the whole exercise exists so that the IRS can see the money that moved between a US entity and the foreign person who owns it, which is why the penalty is written as a flat sum for a missing page rather than as a percentage of an underpayment that in most of these cases does not exist at all. The form does not care about the revenue. Nobody is being fined for holding money back from the United States. They are being fined for not sending a page.

What counts as a transaction when the company did nothing

My mental model was that a dormant company reports nothing, because nothing happened. Part V of the form is where that model breaks. It covers any other transaction between the entity and its foreign owner, and the instruction spells out what that includes: amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to it and distributions from it. Those get described on an attached statement. The list is broader than it looks.

Read that against a first year. You paid a state filing fee through the entity, you wired 2,000 dollars in to open the bank account, you paid a registered agent. Every one of those is a contribution or a payment in connection with formation. None of it feels like a transaction at the time. The year you created the company is almost guaranteed to be a reporting year, which is the opposite of the intuition that says a company with no revenue has nothing to say.

There is a real exception and it is narrow. Read it before you assume it saves you. The instruction lets a reporting corporation skip the form when it had no reportable transactions of the types in Parts IV and VI, and for a foreign owned entity, none of the type in Part V either. A company that was formed in an earlier year, took no money in, sent no money out and paid nothing through itself can sit out that year. I have not found a way to make a first year qualify, because Form 5472 counts the formation payments themselves.

The arithmetic when the page is missing

The federal penalty is 25,000 dollars for a reporting corporation that fails to file when due and in the manner prescribed. Filing something substantially incomplete counts as failing to file, which I read twice because it means a rushed form is not obviously safer than a late one.

Then the escalation, and this is the part almost nobody quotes. If the failure continues more than 90 days after the IRS notifies you, another 25,000 dollars applies, and it applies for each related party for each 30 day period or part of one while the failure continues. A single foreign owner ignoring letters for a year past that point is looking at 12 additional periods, which is 300,000 dollars on my arithmetic rather than the published figure, and the instruction adds that criminal penalties under sections 7203, 7206 and 7207 can also apply.

California charges for the same failure separately. Its penalty chart puts a 25,000 dollar penalty per taxable year under Revenue and Taxation Code section 19141.5 on failure to file or furnish the information required under IRC section 6038A. So an LLC that is doing business in California and skips one page can be billed twice for it, once federally and once by the state. I went looking for that line because I did not believe a state would mirror a federal information penalty, and there it is in their own chart.

Set that against the thing everybody worries about instead. The federal income tax on a foreign owned LLC with no US source income is zero, and people spend real money on advice to confirm the zero. The exposure that is actually sitting there is a fixed 25,000 dollars for an unsent page, and I have never once been asked about it by somebody who had already paid for that advice.

How the thing is actually filed

This is where my correction stopped being embarrassing and started being useful, because the mechanics are strange enough that knowing the rule is not sufficient. The instruction says it plainly, next to a caution icon: “If you are a foreign-owned U.S. DE, you cannot file Form 5472 electronically.” I have read that line 4 times looking for an exception and there is not one.

What is left is fax or post. That is the whole list of channels. The fax number in the instruction is 855-887-7737 and the scan has to be 300 DPI or higher. The postal address is Internal Revenue Service, 1973 Rulon White Blvd, M/S 6112 Attn: PIN Unit, Ogden, UT 84201, and it is not the address printed in the ordinary Form 1120 instructions. The words Foreign-owned U.S. DE go across the top of the 1120 in the instruction's own capitalisation, and that line is what routes a nearly blank return to the unit that expects it.

A couple of details in the penalty section change how I would fill it in. Filing something substantially incomplete counts as a failure to file, and the same 25,000 dollars also applies to failure to keep the records required under regulations section 1.6038A-3. My reading, and it is a reading rather than a quote, is that skipping the attached statement that describes the Part V transactions is the most likely way an otherwise honest filing becomes incomplete.

The other detail matters for anybody holding more than one entity. Each member of a group filing a consolidated information return is a separate reporting corporation with its own 25,000 dollar exposure, and the members are jointly and severally liable for it. Three dormant holding companies filed as one careless bundle is not one risk of 25,000 dollars, it is 3 of them sitting on the same people.

The extension is the same awkward way round. It is worth doing early rather than in the last week, because the channel is slow and the transmission report is the only proof you will hold in your hand, and a page posted to Ogden from Lisbon leaves you with nothing to show for a month. Form 7004 gets the code for Form 1120 on Part I line 1, the same Foreign-owned U.S. DE across the top, and it goes to the same fax number or the same Ogden address by the regular due date of the return. Sending the extension to the normal 7004 address is not obviously fatal, and I would not want to be the person who tests that in a year with a 25,000 dollar penalty attached to the answer.

An aside that has nothing to do with the rule and everything to do with getting it done. The fax is the only channel that gives you a same day timestamp you control, and most people abroad no longer have a way to send one. A browser fax service costs a few dollars, and I keep a receipt of the transmission report with the year's file, because a mailed page to Ogden from outside the United States gives you nothing to point at for weeks. Back to the form, and to the reason the channel is worth this much attention.

What this quietly slows down second

The penalty is the loud part and it is not the expensive one. The part that actually costs people is that this filing falls outside every pipeline they already have. An accountant e-files the owner's personal return, the LLC has no return in the software, and a form that cannot be transmitted electronically does not appear in anybody's list of things due. No bank, marketplace or payment provider asks for proof that it was filed. Nobody external reminds you either. The year passes and nothing happens.

That is why the failure repeats rather than happening once. I suspect, and this is a guess I would not defend hard, that the typical case is 3 or 4 consecutive years discovered together rather than a single missed page, because nothing in the founder's world changes when the year is skipped. The escalation clause is built for exactly that pattern.

My guess is that most of these are found by the second accountant rather than by the IRS, at the point where somebody sells the company or applies for something that needs 3 years of clean paperwork. I would not put weight on that, since I have no data behind it beyond the order in which people arrive asking about the 25,000 dollars.

What I could not establish

How many of these penalties are actually assessed against small foreign owned LLCs each year. The IRS publishes penalty data in aggregate categories, and I could not find a breakdown that separates the 25,000 dollar information penalty by entity size or by whether the filer was a disregarded entity. Without that number, everything anybody says about the odds of getting caught, including anything I might say, is a guess. So I stopped quoting odds to people.

Then the abatement question, which I care about more. Whether reasonable cause relief works in practice for a first year filer is something I cannot answer. The regulation under section 6038A provides for it, the California chart lists reasonable cause and not wilful neglect as a defence to its own version, and I have not found published figures on how often either is granted. I asked 2 accountants and got 2 answers, which is usually a sign that nobody is looking at the same data. One said the first year is routinely forgiven on a letter. The other said he had never seen the 25,000 dollars abated at all, on any facts, for any client, and that he now files the pro forma return for dormant companies purely so the question never comes up.

The one I keep coming back to is smaller and stranger, and it is about 25,000 dollars sitting behind a fax machine. The only filers who cannot use the electronic channel are the ones guaranteed to be outside the United States, holding a form whose first penalty is 25,000 dollars, sending it to a fax number. I do not know why it was built that way, and I am no longer sure the answer is interesting, but I have stopped assuming that the awkwardness is accidental.