No More Hiding in U.S. Disregarded Entities Under IRS Rules

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By Alison Bennett and Chris Marr

May 6 — Officials said the government will get crucial information on foreign companies doing business in the U.S. through disregarded entities under new IRS rules, with one practitioner saying it is another piece of a broader theme of transparency and disclosure happening all over the world.

The rules are one feature of a package of action unveiled May 5 by Treasury Secretary Jacob J. Lew that included the proposed regulations, legislation that would force companies to hand over information on their beneficial owners when they are created, and a final rule requiring banks to get more information on account owners.

New Reporting Required

Proposed May 6, the rules (REG-127199-15; RIN:1545-BM94), apply to foreign entities operating through disregarded entities in the U.S. The rules would treat these entities as domestic corporations separate from their owners—structures that now would be required to report to the IRS in ways they haven't had to before.

The guidance is aimed at single-owner limited liability corporations.

Treaty Partners Asking for Information

IRS Associate Chief Counsel (International) Marjorie Rollinson said part of the reason the IRS issued the guidance is that “we can't give ownership information to our treaty partners who have been asking for it.”

Speaking at a May 6 meeting of the American Bar Association Section of Taxation, Rollinson said the guidance is “very limited” and applies only to reporting rules.

Speaking to Bloomberg BNA at the meeting, U.S. Deputy Assistant Treasury Secretary for International Tax Affairs Robert Stack said the rules reflect “general frustration that non-U.S. people use U.S. LLCs and our tax authorities didn't have access to the information.”

New Category of Transactions

Foreign owners would have to do the same reporting and compliance that is required for 25-percent foreign-owned corporations under tax code Section 6038A.

In addition to getting an employer identification number from the IRS, foreign owners of domestic disregarded entities would have to file the 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). The rules are intended to ensure that owners disclose all transactions with foreign related parties.

To ensure that these entities have to report all transactions with related parties, the rules create a new category of reportable transactions. This would include any transaction within the meaning of Treasury Reg. Section 1.482-1(i)(7), including any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.

Joe Calianno, a partner with BDO USA LLP told Bloomberg BNA, “You're seeing more transparency in reporting generally. It's consistent with the theme of additional transparency and disclosure all over the world,”

Calianno said if finalized in their current form, the rules would create an additional compliance burden for foreign-owned companies doing business in the U.S.

Beneficial Ownership Legislation

Treasury also said its legislation to force corporations to report their beneficial owners would be a new weapon in its fight to find hidden assets.

In another step as part of this ongoing effort, Treasury sent draft legislation to Capitol Hill that would require companies to hand over information on beneficial owners at the time they are created or face penalties if they don't comply. The data could then be turned over to law enforcement.

Lew sent a letter May 5 to tax-writers urging support for the legislation, but staffers said they're still reviewing it (88 DTR G-3, 5/6/16).

“We’ve got it,” said Mark Prater, chief tax counsel on the Senate Finance Committee. “We’re looking at it.” But he said he and his staff still needed to confer before formally responding to Lew’s request for legislation to effectively expand the department’s ability to follow paper trails.

Prior legislative efforts haven't gone far. A bill (S. 1465) introduced in 2013 never left the Senate Judiciary Committee despite being drafted by a bipartisan group of senior lawmakers: Current Judiciary Committee Chairman Charles E. Grassley (R-Iowa), Tom Harkin (D-Iowa), and Dianne Feinstein (D-Calif.).

Panama Papers Adding Support?

Publicity around the Panama Papers leak could boost political support for legislation requiring ownership information on foreign-owned corporations and tougher bank disclosure rules, as proposed by the Obama administration.

Nevertheless, industry experts speaking at the Florida International Bankers Association Wealth Management Forum expect to still face resistance.

Among those that might fight Obama’s legislative proposals, state officials in states with a growing business in setting up foreign-owned, anonymous LLCs could fight to protect the economic benefits they enjoy, said David Schwartz, the association’s president and chief executive officer.

“There’s a lot of momentum [for legislation] right now, but it’s also an election year, and a pretty contentious election year,” Schwartz said. “We’ll see whether it can gain traction in Congress.”

Ongoing Crackdown

The three actions follow years of U.S. efforts to attack offshore tax evasion by Treasury, the IRS, and the Justice Department on a variety of fronts.

Tens of thousands of people are telling the U.S. about their overseas assets on the Report of Foreign Bank and Financial Accounts (FBAR), while overseas banks are turning over information on their U.S. account holders under the Foreign Account Tax Compliance Act.

DOJ continues to clamp down on foreign banks that are helping to hide money from U.S. tax authorities, with successful enforcement efforts against dozens of banks in Switzerland and ongoing efforts to ferret out bank abuses in other countries.

Transparency a Foregone Conclusion

Some bankers and lawyers working in wealth management and offshore finance said they came to accept ever-increasing disclosure requirements as a foregone conclusion long before the publicity around the Panama Papers.

They attributed the trend primarily to the enactment of the Foreign Account Tax Compliance Act in 2010 in the U.S. and subsequent adoption in many other countries of the OECD’s Common Reporting Standard , which calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions annually.

“Anyone that stands still and doesn’t accept the fact that we’re moving toward a world of tax transparency is being foolhardy,” said Steven Cantor, an attorney and managing partner at Cantor & Webb in Miami.

For the general public, however, the leak and coordinated media coverage of 11.5 million documents from Panama-based law firm Mossack Fonseca & Co. beginning in early April raised awareness of the offshore finance industry and the use of anonymous corporations, he added, speaking on a May 5 panel discussion at the FIBA conference.

“The Panama Papers release is definitely a watershed moment. Will it ultimately result in legislation [winning approval]? That’s yet to be seen,” Cantor said.

The Treasury Department rules requiring more disclosures from financial institutions appear at first glance to match the procedures already followed by many banks with international lending operations, said Jeff Gross, division head for real estate finance at BAC Florida Bank.

More Due Diligence

In a third action, the government finalized a rule (RIN:1506-AB25) requiring banks to identify and verify anyone who owns 25 percent or more of a legal entity, and an individual who controls the entity.

That rule may disappoint some who said the 25-percent ownership provision in the proposed rules was too high and it should be 10 percent to be effective. Senate Finance Committee top Democrat Ron Wyden (Ore.) said April 8 that he strongly supported the change to 10 percent (69 DTR G-3, 4/11/16).

“From the perspective of an international bank, this is nothing new. It’s business as usual,” Gross told Bloomberg BNA on May 6.

Economic, Safety Concerns Cited

Despite the momentum sparked by the Panama Papers coverage, Miami attorney Richard Zelman said “it’s going to be a fight” to get a tougher corporate disclosure law passed through Congress.

U.S. officials “want more regulation, more disclosure,” he said. “On the other hand, some of us are in a position where we know what kind of effect that’s going to have, certainly on the South Florida real estate market.”

Wealthy clients from around the world also have legitimate reasons to keep their accounts and corporations anonymous, Zelman, co-managing director of Sacher, Zelman, Hartman, told Bloomberg BNA at the FIBA conference. In some countries, he said, information disclosed to tax authorities under a FATCA reciprocal agreement with the U.S. is prone to being leaked and misused for political retribution, extortion or even kidnapping.

“I’m not comfortable with that,” he said. “Are we going to provide the information we have on a person’s bank accounts to the Venezuelan government?”

In some cases, the U.S. government holds back on FATCA information sharing until foreign tax authorities can assure it the information will be kept confidential and used only for tax collection purposes. This is the case now in the agreement with Colombia, said Rodrigo Castillo Cottin, an attorney with Baker & McKenzie in Colombia, who spoke at the FIBA conference.

Colombia’s intergovernmental agreement with the U.S. under FATCA took effect in June 2015, and Colombia began sending information to the IRS in September, he said. The country hasn’t received any information from the IRS in return, as the U.S. is concerned about the security of the data.

“Taxpayers are afraid of how the information will be used in Colombia once the information is received by the tax office,” Castillo said.

Accountability Advocates Concerned

The administration’s push for more transparency wasn't without its detractors from accountability advocates either.

In a May 6 conference call organized by the Financial Accountability and Corporate Transparency (FACT) Coalition, Mark Hays senior adviser with Global Witness called the administration’s response “tepid” for its lack of a proper definition of beneficial ownership.

Heather Lowe, legal counsel and director of government affairs for Global Financial Integrity, called the proposed legislation weak on the current threshold for reporting beneficial owners.

Lowe called the threshold change essential. “If the threshold is 25 percent, you can just get three to four straw men to put their names down and dilute the holding so nobody has to put their name down at all.”

Lowe also noted that the Treasury already defines beneficial ownership at 5 percent for public companies.

But a spokesperson from the Treasury stood by the ownership definition and 25 percent threshold, stating that these decisions were made, “as ways to balance the burden on financial institutions and legitimate actors with the needs of law enforcement” and that the rest of the world utilize the same 25 percent threshold and “control prong”—somebody defined as a high level official at the company, which wouldn't include a nominee or lawyer—for definition of ownership.

With assistance from Aaron E. Lorenzo in Washington.

To contact the reporters on this story: Alison Bennett in Washington at and Chris Marr in Miami at

To contact the editor responsible for this story: Brett Ferguson at

For More Information

Texts of the IRS proposed rules (REG-127199-15) and the FinCEN final rules (RIN:1506-AB25) are in TaxCore.