Reporting requirement of a foreign-owned disregarded entity
TAX ALERT |
With the beginning of the filing season for calendar year taxpayers upon us, certain taxpayers should be aware of new filing obligations related to Form 5472. In December 2017, the IRS finalized regulations under section 6038A and 7701 that now require that a U.S.-based disregarded entity (DRE) wholly owned by a foreign parent to be classified as a domestic corporation for purposes of section 6038A.
The implications of such classification will require that the DRE obtain a U.S. EIN number and file certain information returns, including Form 5472, for certain transactions with the foreign parent.
Prior to the regulations, the foreign-owned U.S. DRE had no filing responsibilities. Now, effective for taxable years beginning on or after Jan. 1, 2017, a U.S. DRE is treated as a corporation and is required to file a pro-forma Form 1120 and include Forms 5472 to report any information about distributions, contributions to or from its sole member, as well as any other reportable transactions. Such filing also requires the filing of an extension to file a pro forma Form 1120, if one is needed.
Any foreign-owned, U.S.-based DRE that is near its original filing deadline and is unprepared to file the Form 5472 to report transactions with its foreign parent, should file a Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns, to avoid the application of penalties under IRC section 6038A. The TCJA increased the penalty for failure to file a timely Form 5472 from $10,000 per form to $25,000 per form for tax years that begin after Dec. 31, 2017. Timely filing of a pro-forma Form 1120 with Forms 5472s is important to present an accurate Form 5472.
The filing due date for DRE’s pro-forma Form 1120 is the due date attributable to the foreign parent’s tax year, otherwise it is a calendar year.
A U.S. DRE that failed to timely file either the extension or the pro-forma Form 1120 with Forms 5472, should consider filing the late pro-forma Form 1120 with the accompanying Forms 5472 using the Delinquent International Information Return Submission Procedures (DIIRSP). DIIRSP is available to a taxpayer that has not filed one or more required international information returns, has reasonable cause for not timely filing the information returns, is not under civil examination or criminal investigation by the IRS and has not already been contacted by the IRS about the delinquent information returns.
Submission of a pro-forma Form 1120 with the relevant Forms 5472 under DIIRSP will help to mitigate the risk of a potentially very high penalty. Such submission requires taxpayers to attach a reasonable cause statement, which needs to be carefully drafted to make sure that the reason for late filing of the pro-forma Form 1120 rises to the level of reasonable cause warranting abatement of the penalty.