Foreign-owned disregarded entities would be required to report.

• Author: Nevius, Alistair M.

U.S. disregarded entities owned by foreign persons would be treated as domestic corporations under regulations proposed by the IRS (REG-127199-15). The new rules would apply for purposes of the reporting, record maintenance, and other compliance requirements that apply to 25% foreign-owned domestic corporations under Sec. 6038A.

The IRS is justifying the change as a necessary enforcement measure, as well as to give the agency better access to information it needs to satisfy U.S. obligations under various tax treaties, tax information exchange agreements, and other international agreements.

Under the "check-the-box" regulations, a business entity with a single owner can be disregarded as separate from its owner for various tax purposes and may not be required to file a U.S. tax return or obtain an employer identification number (EIN). As a result, the IRS may lack information about the entity. In a letter to Speaker of the House Paul Ryan, R-Wis., on May 5, Treasury Secretary Jack Lew described the current situation as a "loophole in our system that allows foreign persons to hide assets in U.S. accounts."

[ILLUSTRATION OMITTED]

The IRS says that various international organizations, such as the Financial Action Task Force and the Organisation for Economic Cooperation and Development's Global Forum on Transparency and Exchange of Information for Tax Purposes, have noted that this lack of information about disregarded entities hinders U.S. law enforcement efforts and makes U.S. compliance with international tax transparency and information exchange standards difficult.

Therefore, the IRS is proposing to use the provisions of Sec. 6038A to impose reporting and recordkeeping requirements on certain disregarded entities. Sec. 6038A requires a domestic corporation that is 25% foreign-owned to annually file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), for its foreign owner and other foreign related parties with which the entity has a "reportable transaction." The entity is also required to keep permanent books of account and other records under Sec. 6001.

The proposed regulations would amend Regs. Sec. 301.7701-2(c) (part of the check-the-box...