I can’t seem to find any solutions online, so I’d appreciate any helpful suggestions.  

TV settings:

HDMI Input Audio Format: Bitstream

Digital Sound Out: Pass Through

eARC: On

Apple TV 4K Audio Format settings:

Change Format: OFF

Dolby Atmos: ON

PS5 settings:

Output Device: HDMI Device (AV Amplifier)

HDMI Device Type: AV Amplifier

Number of Channels: 5.1ch

Audio Format (Priority): Linear PCM for gaming or when watching a DTS-encoded Blu-ray disc. When streaming content from the PS5 or watching a Dolby TrueHD/Dolby Atmos encoded Blu-ray disc, change this setting to Dolby.

When watching Blu-ray discs, there is another audio setting that must be adjusted when you start the disc. Tap the Options button on the controller, select the “…” and change the Audio Format setting to Bitstream for Dolby-encoded discs. Change this setting to Linear PCM for DTS-encoded discs.

Xbox settings:

HDMI Audio should be set to 5.1 uncompressed for non-Dolby Atmos content and gaming. Change the setting to Dolby Atmos for home theater for all Dolby Atmos content. Enable Allow passthrough.

This was a legendary reply.  Thank you so much!

This does not work for me. I got my 77 LG C2 last night and I spend half the morning trying to get the sound to work. I have all the settings right, but I can’t get Dolby Atmos or 5.1 Compressed. My Xbox is simply telling me that the TV is not capable of it. If I run my Xbox directly to my receiver (not 120hz capable) then I can get Dolby Atmos no problem, however since I want the 120hz I am running my Xbox directly to the tv and using ARC. No Bueno. 

What specific content are you playing on the Xbox? What audio format is displayed in the Sonos app? Do the TV’s native apps play the correct audio formats?

Do you have an XBox and an LG C2? It doesn't matter what content you play on an Xbox, you just select Dolby Atmos for Home Theater and off you go. The problem is, that option goes away completely when I select ARC sound. 

You should disconnect everything and unplug the TV, Arc, and Xbox from power for a couple of minutes and test it again. Also be sure you are using the HDMI cable that came with the Arc.

FYI… if you set the Xbox to Dolby Atmos for Home Theater, you get fake “Dolby Atmos” from non-Atmos sources. So content does matter.

I've tried everything, tried all the settings,  updsted the software, power cycled, pulled out power supplies, checked all the forums everywhere, posted several places, I am getting nowhere. Content does not matter here becuase I don't even have the option to select Dolby Atmos at all. As soon as I set it to ARC, that option goes away altogether. I appreciate you trying to help, but I don't think you have a C2 and an Xbox Series X running sound through ARC or you would  would be in the same boat as me. 

Similar problem with 77” LG C2.  I'm not able to get passthrough working from Xbox Series X or PS5 to my LG C2 and down to Sonos Arc.  Setup is straightforward:

HDMI Port 1: Xbox Series X

HDMI Port 2 (earc): Sonos Arc

LG C2 settings: hdmi input audio format is Bitstream, digital sound output Auto (I've also tried passthrough, doesn't change anything), eArc support is of course turned on.

Xbox audio testing menu shows my TV supports stereo uncompressed, dolby digital, and dolby atmos - but not 5.1 or 7.1 uncompressed? I've read elsewhere (in this form and others) that this is supported for LPCM at least.  My old setup used HDFury Arcanas and was a lot more convoluted, but at least gave me the proper sound.

Is this an LG issue or a Sonos issue?

I am certain that this is an LG issue at this point. 

I was able to get it to work after a long while.  Set the Digital Sound Output to “Passthrough”, turned off Xbox and LG and unplugged them and waited for multiple minutes (I think this was the crucial step).  When everything was up and running, it now showed uncompressed 5.1 as an option.

This makes me think you are correct - this is an LG issue.