INTRODUCTION
Foreign owners of U.S. limited liability companies (“L.L.C.’s”) are often told that the L.L.C. is a disregarded entity for U.S. tax purposes. They assume that it means exactly that: disregarded.
The assumption is understandable. It was true in almost every relevant respect for many years. It is still true for U.S. income tax purposes. A single-member L.L.C. generally files no income tax return of its own. Its income, deductions, and assets belong directly to its owner.
But the assumption is wrong in one important respect.
Since 2017, a foreign-owned single-member L.L.C. has been treated as a domestic corporation for purposes of the reporting and record-maintenance obligations under Code §6038A. The reporting mechanism is Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business). The I.R.S. instructions confirm that a reporting corporation includes a 25% foreign-owned U.S. corporation, including a foreign-owned U.S. disregarded entity.
Failure to file, or failure to maintain the required records, carries a $25,000 penalty per form per year. Additional $25,000 penalties may follow for continued noncompliance after I.R.S. notice. There is no meaningful cap.
But there may be hope for taxpayers that can show reasonable cause.
On April 24, 2026, the I.R.S. released Chief Counsel Advice 202617012 (“C.C.A.”). The C.C.A. addresses when the reasonable cause exception to the Code §6038A penalty applies and, in particular, what it means for the I.R.S. to apply that exception “liberally” for certain small corporations. The C.C.A. may not be used or cited as precedent, but it is still a useful window into how the I.R.S. may evaluate these requests.
BACKGROUND
Many foreign owners missed the 2017 change to the scope of the disregarded nature of their L.L.C.’s. This is especially true where the L.L.C. was formed before 2017 and was never used to conduct an active U.S. business.
Many owners learned about the issue only when the Corporate Transparency Act (“C.T.A.”) was about to become effective. By way of short reminder, the C.T.A. was enacted in 2021 to create a nonpublic beneficial ownership database. It was intended to apply to many domestic and foreign entities and to help combat money laundering, terrorist financing, tax fraud, and similar activity. In 2024, the law became effective, and existing entities were generally expected to file by January 1, 2025. Litigation then created major uncertainty. In March 2025, FinCEN issued an interim final rule removing beneficial ownership reporting requirements for U.S. companies and U.S. persons, while leaving certain foreign entities registered to do business in the United States within the narrowed regime.
For foreign owners of U.S. L.L.C.’s, the C.T.A. scare had a useful side effect. It caused them to look at their U.S. entities. When they did, many discovered that Form 5472 had been required for years.
The practical reach of this rule is broader than many expect. The foreign owner does not need to be a foreign corporation. The L.L.C. does not need to have U.S. income. It does not need to operate a U.S. business. It does not even need to have a bank account.
Form 5472 is required when the foreign-owned disregarded entity has a reportable transaction with its foreign owner or another related party. Reportable transactions include contributions, distributions, loans, interest payments, and other monetary or nonmonetary transactions. Part V of Form 5472 specifically reaches transactions of foreign-owned U.S. disregarded entities, including amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity, and contributions to and distributions from the entity.
Consider the following situations:
- A foreign family uses a U.S. L.L.C. to hold U.S. real estate for personal use. It is true that this, on its own, is not an estate-tax-protected structure, but other solutions for that problem may exist.
- A foreign individual uses a U.S. L.L.C. as part of a foreign tax planning structure. For example, in some jurisdictions, owning foreign real estate through a U.S. L.L.C. may convert what would otherwise be a taxable sale of real property into a potentially different local-law result on a sale of shares or interests.
- A foreign individual forms a U.S. L.L.C. to provide personal services from outside the United States to U.S. customers.
In each case, the owner will almost certainly make payments to keep the L.L.C. alive. Registered agent fees, state annual fees, tax preparation fees, and other routine expenses may be paid directly by the owner. Those payments may feel informal. They may not be labeled as capital contributions. But for Form 5472 purposes, they may be reportable transactions.
To file Form 5472, the L.L.C. must obtain an employer identification number. The Form 5472 is filed with a pro forma Form 1120, on which only limited identifying information is completed.
When the missed filing requirement is discovered, compliance often goes back at least three years. Reasonable cause statements are prepared. Late pro forma Forms 1120 and Forms 5472 are filed. The hope is that the taxpayer can come into compliance without a $25,000 penalty for each year and each relevant reporting obligation.
The new I.R.S. guidance gives some reassurance that, in certain cases, penalty relief is realistic.
C.C.A. 202617012
The Penalty and the Reasonable Cause Exception
Code §6038A(d) imposes a $25,000 penalty for failure to provide required information or maintain required records. Additional $25,000 penalties may apply for each 30-day period, or fraction of a 30-day period, during which the failure continues after 90 days from I.R.S. notice. The C.C.A. confirms both the initial penalty and the continuation penalty structure.
However, the penalty does not apply if the failure is due to reasonable cause. The regulations require an affirmative showing, made in a written statement signed under penalties of perjury, that the taxpayer acted in good faith and that reasonable cause existed for the failure. The C.C.A. confirms that the determination is made case by case, taking into account all relevant facts and circumstances.
The general reasonable cause standard applies to all reporting corporations. A separate, more favorable provision applies to certain small corporations.
The Small Corporation Provision
The regulations provide that the I.R.S. “shall apply the reasonable cause exception liberally” in the case of a small corporation that
- had no knowledge of the Code §6038A requirements;
- had limited presence in and contact with the United States; and
- promptly and fully complied with all I.R.S. requests to file Form 5472 and furnish books, records, and other relevant materials.
For this purpose, a small corporation is a corporation whose gross receipts for the taxable year are $20 million or less. The C.C.A. emphasizes that this is an overall gross receipts test, not merely a U.S. gross receipts test.
Before C.C.A. 202617012, there was very little guidance beyond the regulatory text, which itself comes from the legislative history of the statute, on how a taxpayer qualified for this relief or what “liberally” meant in practice. No court had interpreted the provision. Prior guidance acknowledged the exception without adding much substance. The C.C.A. addresses both questions.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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