FIRPTA, Foreign-Owned LLCs, Form 5472 & Form 1120: A $25,000 IRS Penalty Wake-Up Call
- Richard Kahn
- 3 days ago
- 4 min read
$5 Million Sale. $750,000 FIRPTA Withholding. Potential $100,000 IRS Penalty Exposure.
If you are a foreign seller — or a Realtor, closing agent, title professional, attorney or accountant assisting one — there is another question worth asking whenever a foreign-owned LLC appears in a FIRPTA transaction:
Has the LLC's separate U.S. federal reporting requirement been reviewed?
Because properly addressing FIRPTA does not necessarily mean the foreign-owned entity itself is in compliance.
And finding that out years later can be expensive.
A Real-World FIRPTA Wake-Up Call
A recent matter handled by FIRPTA Refunds involved approximately $750,000 of FIRPTA withholding on a $5 million U.S. real estate transaction.
That's a substantial withholding problem by itself.
But during the FIRPTA refund and filing follow-up, another issue surfaced.
The ownership structure included a foreign-owned U.S. entity with separate federal information-reporting requirements involving Form 5472 and a pro forma Form 1120.
The foreign owner was unaware of the requirement.
The filings had not been made.
And multiple missed filing years created potential IRS penalty exposure approaching $100,000.
That potential exposure was separate from the $750,000 already withheld under FIRPTA.
One real estate transaction. Two very different federal tax compliance issues.
The $25,000 Per Failure Form 5472 Problem
Certain foreign-owned U.S. entities — including many foreign-owned U.S. disregarded entities — have separate IRS information-reporting requirements.
Beginning with tax years in 2017, these reporting requirements were expanded to include certain foreign-owned U.S. disregarded entities.
When required, the entity generally files Form 5472 attached to a pro forma Form 1120.
The filing requirement can exist even when the LLC generated little or no taxable income.
And overlooking it can be costly:
$25,000 IRS penalty per Form 5472 filing failure.
Multiple missed years can therefore create substantial accumulated penalty exposure.
“But My Accountant Handled My Taxes.”
That's precisely why this deserves attention.
Foreign nationals investing in U.S. real estate commonly assemble a team of professionals:
Realtor
Closing or settlement agent
Title professional
Attorney
CPA or tax preparer
Each professional may handle a different part of the transaction.
But who is looking at the foreign-owned entity?
Who asks whether the LLC has separate federal information-reporting obligations?
Who tells the foreign owner that filing an individual U.S. income tax return — and properly handling FIRPTA at closing — does not necessarily satisfy the separate reporting requirements of a foreign-owned U.S. entity?
And who raises the question before several years of potential $25,000 penalties accumulate?
You Don't Have to Prepare Form 5472 to Ask the Question
This is particularly important for Realtors, closing agents, title professionals and attorneys.
We are not suggesting that these professionals provide international tax advice outside their expertise or prepare Form 5472.
Quite the opposite.
Recognizing an issue is not the same as having to solve it.
When a foreign-owned LLC appears in the ownership structure, one simple question may prove enormously valuable:
“Has your tax professional reviewed whether this entity has a Form 5472 or other U.S. information-reporting requirement?”
If the answer is “I don't know,” the matter can be referred to someone qualified to determine the answer.
That's professional awareness.
And it may protect much more than the transaction.
What Happens to the Client Relationship When Nobody Asks?
Consider the foreign seller's perspective.
You complete a $5 million U.S. real estate sale.
Approximately $750,000 is withheld under FIRPTA.
Then, while pursuing the appropriate FIRPTA refund, you discover that the entity through which you held the property had another federal reporting requirement that had apparently never been brought to your attention.
Now you may be facing approximately $100,000 of potential IRS penalties.
What happens to your confidence in the professionals who assisted you?
Will you use them for your next U.S. transaction?
Will you recommend them to another foreign investor?
Or will you tell others about the expensive compliance problem nobody identified?
Professionals don't have to know every answer. They should know when a question needs to be asked.
Identifying an issue and referring the client to appropriate expertise can protect the client — and strengthen the professional relationship.
This Is NOT the Buyer's FIRPTA Risk
There is an important distinction.
This article concerns foreign sellers, foreign-owned entities, and potential Form 5472/Form 1120 compliance issues.
FIRPTA imposes separate responsibilities and potential liabilities on buyers and withholding agents concerning withholding and remittance.
Those are different risks.
Foreign-Owned LLC in a FIRPTA Transaction? Check the Entity Too.
The takeaway is simple:
Don't stop at FIRPTA.
When U.S. real estate involved in a FIRPTA transaction is owned through a foreign-owned LLC, determine whether the entity has separate federal reporting requirements.
A question asked before or during the transaction may identify a compliance issue while there is still time to address it — rather than discovering it during a refund claim, IRS inquiry or years later.
FIRPTA Refunds has created this resource specifically to alert foreign sellers and the professionals assisting them to the issue.
For more comprehensive information and assistance, FIRPTA Refunds works with its affiliated company, FPG-USA, which handles foreign-owned entity Form 5472 and related pro forma Form 1120 compliance matters.
FPG-USA's comprehensive resource addresses:
Who may be required to file
Form 5472 and pro forma Form 1120
Reportable transactions
Late and catch-up filings
Potential $25,000 penalties
Multi-entity situations
Compliance assessments and ongoing annual review
Foreign seller? Realtor? Closing agent? Title professional? Attorney? Accountant?
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