I'm Late Filing Form 5472 and 1120 for My Foreign-Owned Single-Member LLC: Penalties and How to Catch Up?

Someone on Reddit is a non-resident (student in the U.S.) with three foreign-owned single-member LLCs in Delaware. They had never filed Form 5472 or Form 1120 for any of them and were worried about the $25,000 per LLC per year penalty, whether they were already penalized, whether there was still time to file with a reasonable cause letter, whether calling the IRS would trigger a red flag, the best way to catch up, and whether to dissolve some of the LLCs. You can still file the overdue forms and include a reasonable cause letter; the IRS may consider reasonable cause to mitigate or eliminate penalties. Filing as soon as possible and consulting a tax professional experienced in foreign-owned entities and Form 5472 is the best approach.

Bottom line: You could be subject to a $25,000 penalty per LLC per year for failing to file Form 5472, plus additional penalties for not filing Form 1120. The IRS does allow reasonable cause to be considered, which may mitigate or eliminate penalties if you can show a legitimate reason for the late filing. File the overdue forms as soon as possible and include a reasonable cause letter with each submission explaining your situation (e.g., non-resident status, nature of the LLCs, address/notice issues). Calling the IRS does not necessarily "trigger a red flag," but be prepared and consider having a tax professional handle inquiries. If you no longer need some LLCs, dissolving them is an option, but consider tax implications and obligations first. For a complex situation, consult a tax attorney or CPA with experience in international tax and foreign-owned LLCs.

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Question from Reddit

Need help. Extremely late 5472 & 1120 filing.

I'm a non-resident (student in the US) (All LLCs were formed before I even thought about studying here) and I set up 3 single-member LLCs in Delaware:

• LLC A (formed in 2022)
• LLC B (formed in 2023)
• LLC C (formed in 2023)

All are foreign-owned single-member LLCs with EINs. I haven't filed Form 5472 or 1120 for any of them yet.

No income was generated inside the US, and all business was conducted online or abroad. I also didn't update my address with the IRS when my registered agent (LegalZoom) changed it, so if any notices were sent, I may not have received them.

Now I'm scared about the $25,000 per year penalty. I've read that it's $25K per LLC per year, so I could theoretically owe a ridiculous amount — but I've never received any notices.

I'm overwhelmed and not sure what to do. My questions are:

1. Am I already penalized? Or is there still time to file and include a reasonable cause letter?
2. Will calling the IRS to ask about my account trigger a red flag?
3. What's the best way to catch up on filings and avoid or reduce penalties?
4. Is anyone here in a similar situation and successfully got penalties waived?
5. Should I dissolve one or two of the LLCs now and just clean up the one I still want to keep?

Any real-world experience or advice would help a ton. I'm trying to make things right but I just don't know how screwed I actually am. Appreciate any help.

Source: Reddit

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Analysis

Your situation involves multiple aspects of U.S. tax law related to foreign-owned single-member LLCs, specifically concerning the late filing of Form 5472 and Form 1120. The penalties for failing to file these forms can be severe, and understanding your options for remedying the situation is crucial.

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Answer

Penalties and reasonable cause

You could be subject to a $25,000 penalty per LLC per year for failing to file Form 5472, and there are additional penalties for not filing Form 1120. However, the IRS does allow reasonable cause to be considered, which may mitigate or eliminate penalties if you can show that you had a legitimate reason for the late filing. You can still file the forms and include a reasonable cause letter explaining your situation (e.g., non-resident status, nature of your LLCs, not receiving notices due to an address change). There is still time to file; doing so promptly is important.

Will calling the IRS trigger a red flag?

Calling the IRS to inquire about your account may not necessarily trigger a red flag, but it is important to be prepared with all relevant information. It is often advisable to have a tax professional handle such inquiries to ensure you receive accurate guidance. For a clearer picture of what you owe and how to present your case, you can create an account with Margen to organize your filings and model scenarios before you contact the IRS or a professional.

Best way to catch up and avoid or reduce penalties

The best approach is to file the overdue forms as soon as possible and include a reasonable cause letter with each submission. The letter should detail your non-resident status, the nature of your LLCs, and any extenuating circumstances (like not receiving notices due to an address change). Consulting a tax professional experienced in international tax and foreign-owned LLCs may be beneficial to navigate this complex situation effectively.

Dissolving LLCs

If maintaining some of the LLCs is not feasible or necessary, you can consider dissolving them. This should be done with careful consideration of any potential tax implications and ongoing obligations (e.g., final returns, Form 5472 for years before dissolution).

Related: Forgot Final Return on 1120/5472, Foreign-Owned LLC: $25K Penalty? · Entity Classification Election Mistake (LLC vs C-Corp) · Single-Member LLC Passthrough and Schedule C · How Do I File Form 1065 and Get K-1s for a Multi-Member LLC?

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Applicable Sections

Federal / IRS

• Form 5472: Required for foreign-owned U.S. disregarded entities (including single-member LLCs). Failure to file can result in a $25,000 penalty per year per entity under IRC § 6038A and related provisions.
• Form 1120: Used by certain entities (including foreign-owned single-member LLCs treated as corporations for reporting) to report income and related information. Late or non-filing can result in additional penalties.
• Reasonable cause: The IRS may mitigate or abate penalties when the taxpayer shows reasonable cause for the failure; see IRC and IRS guidance on penalty abatement.

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Practical Notes

• File the necessary forms as soon as possible to minimize penalties.
• Document all correspondence and keep thorough records of your efforts to comply with tax obligations.
• Hiring a tax professional with experience in foreign-owned entities and Form 5472 may save you time and reduce stress.
• Margen can help you track what's due, organize reasonable cause, and prepare for a pro or an IRS call; consider creating an account to get your situation in order before filing.

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Limitations

This answer does not cover specific state tax implications or detailed procedural steps for filing the forms, which might require further research or professional advice. If your situation is particularly complicated, seeking a tax attorney or CPA with experience in international tax and foreign-owned LLCs is advisable. Margen can help you outline your facts and filings before you engage a professional.