US LLC no ties to the US - can you get taxed by the IRS

[Roo]

Hi,

I spoke to an incorporation agent recently and he recommended me to stay away from US LLC (non-resident, no ties to the US) because:

1. The IRS is an absolute nightmare to deal with and even though I shouldn't pay US tax it will really depend on who from the IRS looks at the stuff I filed and his mood that day and it's very hard to fight their decision which would be based on having the money in a US bank or even EMI (Mercury/Wise/etc).
I've never read about anything like that so I'd like to know if that's complete crap and he wanted to sell me some other more expensive incorporation or it can actually happen.

2. He said that filing will be expensive unless I do it myself and it's risky to submit something wrong to the IRS. He said a CPA will charge no less 1500$-2000$ to file the two forms for a simple non-resident LLC.
This doesn't seem true either since I saw startfleet.io for instance offering filing for about 400$. Can anyone provide some more details on this please?

 

[JackAlabama]

your agent wanna take︅ you for a ride.

 

[Sols]

I wouldn't call the IRS difficult. The opposite is true. The IRS is easy because‌ it's such a predictable tax authority. I think some people use the word difficult when words like aggressive, competent, and powerful are more accurate.

LLCs with no US‍ connections and US ties are not on the IRS' radar. That's good. I don't believe⁠ it's been explicitly stated anywhere that they are for sure not in scope for any⁤ US tax ever, though.

LLCs that violate US federal tax law risk having the tax⁣ enforcement equivalent of an aircraft carrier sent after them. That's a difficult situation to be⁢ in, so it's best not to.

The required filing is quite easy to DIY if︀ you already to some basic accounting. But if you need help, you can shop around︁ and different CPAs will have different fees. I've heard of as low as just a︂ few hundred.

 

[Roo]

@Sols regarding tax, definitely not looking to violate any tax laws, my concern was that‌ although everywhere it's said non-resident US LLC with no US business or presence are not‍ taxed by the US the agent tried to convince me that it's really random based⁠ on whoever from the IRS will look at your forms and they may decide to⁤ pick on you and want to tax you (relating things to remittance if you have⁣ a US bank account) although the law says you shouldn't be taxed in that situation.⁢ It seemed a bit off that things could be so random (it's the US not︀ a banana republic) and people not complain about them.

 

[Sols]

Even if your filings get flagged for manual review (which is already highly unlikely), there‌ is a near zero risk that someone at the IRS does anything other than look‍ at it and file it away.

But let's say they decide to audit you. That's⁠ when your friend called Doing Basic Accounting is going to save your hide. When you⁤ simply export the latest management accounts from your accounting software and attach last year's financial⁣ statements and some bank statements and invoices/agreements, the IRS will see there is nothing in⁢ scope for them.

 

[12345]

You could find somebody on fiverr that could do the accounting for you at 300-400usd‌ monthly but I don't know if these people from India or Pakistan are reliable

 

[Cloudbanck]

On point 2.⁤ that's indeed not true. Normal cost is 300 USD to 400 USD and that's for⁣ a US based service (not fiverr). I paid 300 USD the first year, and since⁢ then I have been doing it myself, there are a few non obvious fields, but︀ overall not so difficult, and there is plenty of material and courses online for it.︁
Basically the IRS wants to know where you are a tax resident, where the LLC︂ is registered, what type of activities the LLC does, and how much money you put︃ in and took out of the LLC over the year. Notably full PnL and Cashflow︄ statements are not required.

And you are better off knowing this stuff yourself than relying︅ on a third party anyway. You care more about your forms than any third party︆ ever will, and third parties can and do make mistakes, and it's good to have︇ the skills to spot them.

But then, non resident US LLC are not really prioritised︈ by the IRS, as they are not paying any tax, so Id say the risk︉ of audit and the IRS checking details in the 1120 + 5472 forms is pretty︊ low.

 

[Roo]

I checked form 5472 and I see it asks for a few things:

• FTIN, if‌ any (see instructions)
  
• Country(ies) under whose laws the ultimate indirect 25% foreign shareholder files an‍ income tax return as a resident
  
• Country(ies) under whose laws the related party files an⁠ income tax return as a resident
  
• Country(ies) under whose laws the reporting corporation files an⁤ income tax return as a resident
  

Does this mean that I would have to provide⁣ a tax ID from the country of residence and could be asked for tax returns⁢ from the country I specify?
If running the LLC from a country with territorial taxation︀ not sure how I would provide any of those, wasn't planning to get tax ids︁ and file foreign stuff at the moment?

 

[Cloudbanck]

Yes, if⁢ the country of residence issues tax ids. And then there are edge cases like the︀ UAE that doesnt issue personal tax ids, but people generally fill in their emirates id︁ number, and US and other authorities seem to accept it.

Highly unlikely, it︃ is unusual the IRS asks for anything from a non resident LLC, but if they︄ do, it would be related to accounts and distributions/contributions of the LLC, not personal tax︅ returns in a foreign country. If one looks at actual cases, it would be when︆ the IRS suspects you are actually running the business from the US, and it is︇ a business of significant size. So that's the thing to watch out for, time spent︈ in the US, and having an office employees/dependent agents in the US.

In which foreign︉ country you are - the US cares less about that. For instance for the W-8BEN︊ form, it is explicitly stated that one doesnt need to file a new one if︋ one moves from one foreign country to another.

 

[JohnLocke]

They have been around for a long time with‍ almost no complaints from what I have seen. You may consult them to get a⁠ better picture of your setup if a US LLC is what you want to proceed⁤ with.

 

[Roo]

Thanks for all the information, I will contact startfleet.

 

[ElBotellon]

this sounds not logical. The W-8BEN form determines the witholding tax that the agent⁤ should apply (e.g. the bank) so if you change country and become tax resident elsewhere⁣ that may determine a different witholding tax, not in line with DTAs.

Have a look⁢ here, https://taxsummaries.pwc.com/united-states/corporate/withholding-taxes
rates differ among countries.

 

[suzy]

They are pretty good, worth to chat with.

 

[Cloudbanck]

Have a read of the⁤ actual text from the instructions of the W-8BEN, here https://www.irs.gov/instructions/iw8ben

"Change in circumstances.

If a⁣ change in circumstances makes any information on the Form W-8BEN you have submitted incorrect, you⁢ must notify the withholding agent, payer, or FFI with which you hold an account within︀ 30 days of the change in circumstances and you must file a new Form W-8BEN︁ or other appropriate form.

If you use Form W-8BEN to certify that you are a︂ foreign person, a change of address to an address in the United States is a︃ change in circumstances. Generally, a change of address within the same foreign country or to︄ another foreign country is not a change in circumstances. However, if you use Form W-8BEN︅ to claim treaty benefits, a move to the United States or outside the country where︆ you have been claiming treaty benefits is a change in circumstances. In that case, you︇ must notify the withholding agent, payer, or FFI within 30 days of the move."

So if you are not claiming treaty benefits, which was the case discussed here, like if︈ you have a US LLC with US clients - where withholding tax doesnt come into︉ play anyway - it is not a change of circumstance if you move around between︊ countries in the world as long as you dont move to the US. And no︋ change of circumstance means no new W-8BEN needed.

However, if we are talking W-8BEN for︌ like a brokerage account where withholding tax is paid on dividends, and you live in︍ a country with 15% treaty withholding tax, and you move out of this country, to︎ say a country without any treaty benefits (i.e. 30% withholding) , then yes, you must️ file a new W-8BEN within 30 days.
And even in this case, if you move‌ around between no treaty benefits countries, or even from a no-treaty country to a treaty‍ benefit country, there is no requirement to file a W-8BEN.

So it is all logical.⁠ If Uncle Sam is due to get more money, you have to file W-8BEN, if⁤ not, Uncle Sam doesnt care, and you dont have to file a new W-8BEN.

 

[sinos]

The real problem isn't IRS, its the bank/emi. EMIs like Mercury, Relay ets are asking‌ for a physical address for business - which may or may not create an ETOB.‍ Also, Mercury has insisted a connection with US/US customers.

 

[ElBotellon]

I understand your point, nevertheless I‍ believe (and I assume we agree on this) that updating it is always better because⁠ apart from witholding it also allows to overrule on ETBUS criteria thanks to the permanent⁤ establishment definition of treaties. So in your example if I have treaty protection and no⁣ permanent establishment I should pay tax only in my country.