The IRS recently announced various targets of investigation and enforcement in the business and international realms.
We would like to highlight one of the IRS’ target areas: tax and reporting compliance for foreign trusts. IRS issues arise for U.S. taxpayers who are named as beneficiaries of foreign trusts; for example, trusts created by foreign relatives who name their U.S. family members as beneficiaries. Compliance issues also arise for U.S. taxpayers who create foreign trusts, including American expats who form trusts for estate planning, as well as U.S. taxpayers who form offshore asset protection trusts.
The IRS announcement specifies “examinations and penalties” regarding IRS Forms 3520 and 3520-A, including “when the forms are received late or are incomplete”. Form 3520 is required to be filed by U.S. beneficiaries who receive distributions from foreign trusts, as well as U.S. grantors who settle foreign trusts or contribute assets to foreign trusts. Form 3520-A is required to be filed by a foreign trustee; however, if a foreign trustee does not file the form with the IRS, often a U.S. taxpayer will be deemed the “responsible party” who is obligated to file this form.
In addition, U.S. beneficiaries of foreign trusts and U.S. grantors of foreign trusts may be obligated to file the “FBAR” form, FinCEN Form 114. Grantors and beneficiaries may also be required to file IRS Form 8938.
The penalties for non-filing can be severe. For “willful” non-filing of the FBAR alone, the penalties can be 50% of the value of the trust’s foreign account that was not reported, plus the penalties for non-filing of Forms 3520 and 8938.
However, there are opportunities to self-correct such failures, provided that the IRS has not already initiated an audit or investigation. If the failure was merely the non-filing of an informational return (such as the FBAR, 8938 or 3520), with no tax loss to the IRS, the cure may be filing the returns with a carefully drafted explanation of non-willfulness and/or reasonable cause. An experienced offshore attorney can assist in drafting this statement. If there is also tax loss to the IRS (e.g., undeclared trust income, undeclared receipt of funds from a trust), then the situation is more complex and likely requires amending tax returns to declare additional income. In such a case, one should consider the IRS Offshore Voluntary Disclosure Program (“OVDP”) which is coming to an end on September 28, 2018, or the Streamlined Offshore Procedures. Again, an experienced offshore attorney can assist you in coming into IRS compliance.
The attorneys are Gallet Dreyer & Berkey have years of experience in foreign trust issues and IRS reporting. Please contact us to discuss your foreign trust issues.
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