For years, foreign investors have been purchasing U.S. real estate through Limited Liability Companies (LLCs), often without realizing the tax and reporting obligations that come with it. Many of these investors assumed that since they had no U.S. tax liability, they didn’t need to file anything with the IRS. However, if a foreign individual owns a single-member LLC in the U.S., that LLC is considered a Foreign-Owned Disregarded Entity (FODE), and that comes with strict reporting requirements.

Failure to file these forms can result in massive penalties– up to $25,000 per year– which many foreign investors may not even be aware they owe. To make matters worse, the recent Beneficial Ownership Information (BOI) reporting requirements under FinCEN could allow the U.S. government to track down these overlooked filings and enforce penalties retroactively.

What Is a Foreign-Owned Disregarded Entity (FODE)?

A Foreign-Owned Disregarded Entity (FODE) is a single-member LLC in the U.S. that is owned by a non-U.S. person or foreign company.

• The LLC itself is disregarded for tax purposes, meaning it doesn’t pay taxes or file a corporate tax return.
• However, it is NOT disregarded for reporting purposes—meaning it still has IRS filing obligations.

The key requirement is filing Form 5472, which is used to report certain transactions between the foreign owner and the LLC.

Why Do Foreign Investors Use LLCs to Buy U.S. Property?

Many foreign investors incorrectly believe that using an LLC allows them to avoid U.S. reporting and tax requirements. LLCs are attractive because they:
✅ Provide liability protection
✅ Avoid estate tax exposure (compared to owning property individually)
✅ Offer privacy, as ownership details are not always public

However, what many investors don’t realize is that the IRS requires reporting on any foreign-owned LLC—even if there is no income, no business activity, and no tax due.

The Hidden IRS Reporting Obligation (Form 5472 & Form 1120 Pro Forma)

Foreign-Owned Disregarded Entities must file:

• Form 5472 – Used to report transactions between the LLC and its foreign owner
• Form 1120 Pro Forma – A simplified corporate tax return that acts as a cover page for Form 5472

These forms must be filed annually by April 15 (or October 15 with an extension). Unlike corporations with a foreign owner, there is a requirement to file Form 5472 even if there are no reportable transactions, this means that the penalty for late filing will accrue to FODEs if not filing on time.

What Counts as a “Reportable Transaction”?

Many foreign investors assume they have nothing to report if they are not running a business. However, the IRS considers even basic financial movements between the foreign owner and the LLC as reportable transactions, including:

• Buying a property through the LLC (capital contribution)
• Contributing funds to maintain the property (e.g., paying property taxes or repairs)
• Receiving rental income or selling the property
• Reimbursing yourself for expenses paid on behalf of the LLC

In short: If money moves between the foreign owner and the LLC, reportable transactions must be included on 5472. But remember, the 5472 must be filed every year still, even if there are no reportable transactions.

How Many Foreign Property Owners Are at Risk?

The number of non-compliant foreign LLC owners could be staggeringly high.

• Over $50 billion in U.S. real estate is owned by foreign individuals and entities.
• Many of these properties are held in single-member LLCs, which are disregarded entities.
• Thousands of foreign investors were never informed about Form 5472.
• Tax professionals and real estate agents often focus on entity formation but fail to advise on tax reporting.

This means that hundreds of thousands of foreign investors could be unknowingly facing massive IRS penalties.

The Shocking Penalties: $25,000 Per Year

Failure to file Form 5472 comes with one of the harshest penalties in the U.S. tax system:

$25,000 per missing form per year!

And it gets worse:

• The penalty increases if the IRS sends a notice and the form is not filed within 90 days.
• The IRS can go back multiple years and stack penalties on top of each other.
• If an investor has owned the property for 8 years without filing (2017 to now), they could be facing a quarter-million dollars in penalties and interest– or more!

Because this is an information reporting penalty (not a tax penalty), it cannot be reduced or waived using normal IRS relief programs. The only way to fix the issue is through voluntary compliance before the IRS contacts you.

How FinCEN BOI Reporting Could Uncover Non-Compliance

The Financial Crimes Enforcement Network (FinCEN) has introduced new Beneficial Ownership Information (BOI) reporting requirements that could expose foreign LLC owners to IRS scrutiny.

What Is FinCEN BOI?

Starting in 2024, all U.S. businesses (including LLCs) must report their beneficial owners to FinCEN, a division of the U.S. Treasury focused on preventing money laundering and tax evasion. While this has been paused with the court injunctions, it may be required within 30 days if the injunction is lifted, or it could be extended until the end of the year with a bill that recently passed the House.

This means:

• Foreign investors who own U.S. LLCs must disclose their identity.
• The IRS may access this data to find non-compliant foreign LLCs.
• Failure to report to FinCEN also carries penalties of $500 per day (up to $10,000 per violation).

If a foreign investor hasn’t been filing Form 5472, but suddenly reports their ownership to FinCEN, the IRS now has a clear path to enforce penalties.

What Foreign Investors Should Do Now to Protect Their Assets

If you are a foreign owner of U.S. real estate in an LLC, it’s critical to act now to avoid penalties. Here’s what you should do:

1. Confirm If Your LLC Is a Foreign-Owned Disregarded Entity

• If you own 100% of a U.S. LLC as a non-resident, you likely have a reporting obligation.
• If your LLC has multiple owners, it may be treated as a partnership (which has different filing rules).

2. File Form 5472 for Any Missed Years

• If you haven’t been filing, it’s best to catch up before the IRS contacts you.
• A tax professional can help you submit missing forms correctly and reduce risks.

3. Ensure BOI Compliance Under FinCEN

• Foreign-owned LLCs must file BOI reports starting in 2024.
• This is paused under the injunction, but a new bill is in Congress to start require filing again by 2026.
• This information could be used by the IRS to identify non-filers.

4. Work with a Tax Professional

• Foreign tax issues are complex, and one mistake can trigger major penalties.
• A tax expert can help you file correctly and explore options to reduce liability.

Final Thoughts: Don’t Let the IRS Catch You Off Guard

Many foreign investors unknowingly owe tens or hundreds of thousands of dollars in penalties because they never filed Form 5472 for their Foreign-Owned Disregarded Entity.

With new FinCEN BOI requirements, the U.S. government now has better tools than ever to track down non-compliant foreign LLC owners—and issue penalties.

If you’ve purchased U.S. property through an LLC, you may be at risk. The best course of action is to take control now, before the IRS finds you.

Have questions? Need help filing? Contact us now. Now is the time to get ahead of the problem and protect your investment before it’s too late.