If you’re considering purchasing or launching a new business in the U.S. on an E-2 or L-1 visa, your immigration lawyer or a local U.S. accountant might recommend forming an LLC. It’s simple and offers asset protection. However, they may not be aware that, for a Canadian, a U.S. LLC could pose a major tax trap.
In most cases, U.S. immigration lawyers or local U.S. accountants lack knowledge of Canadian tax laws, and Canadian accountants are unfamiliar with U.S. tax laws. This creates a dangerous Advisor “Blind Spot” that leads to a $25,000 IRS penalty.
The $25,000 IRS Penalty
Canadian accountants assume an inactive or pre-revenue US LLC requires no US filings, while US accountants often overlook it because they assume a single-member LLC requires minimal reporting, leaving their clients exposed to catastrophic IRS fines.
The IRS has strict rules for foreign owners of a US LLC. Under IRC Section 6038A, a non-U.S. person who owns 100% of an LLC must report related-party transactions by filing Form 5472 alongside a pro-forma Form 1120 every single year. You have to file this even if your business made zero dollars or if you just opened a bank account or transferred initial funds. The penalty for failing to file, or filing incompletely, is an automatic $25,000 per year, per form, under IRC Section 6038A(d)(1), with additional $25,000 continuation penalties every 30 days under IRC Section 6038A(d)(2).
Solution
Find an accountant who understands cross-border tax to help file the Form 5472 and all related forms to stay in compliance with the IRS. If you just found out about the filing requirements for the foreign-owned US LLC and are late in filing Form 5472, then you must take immediate action by filing the Form 5472 and requesting penalty abatement under reasonable cause under Treasury Regulation Section 1.6038A-4(b).
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