It should be noted that provisions set forth in this revenue procedure may be subject to change with the promulgation of these proposed regulations. This article is designed to be a guide to general principles in a highly technical area and should in no way be construed as tax or legal advice. In conclusion, if the reader finds his or her client has any US tax exposure or US assets, then working with specialist US counsel is essential.

The compliance team should review the list of common fact patterns requiring foreign trust reporting and determine all the clients that may have a foreign trust reporting requirement. When foreign trust filing requirements are identified, place them on the due date listing and determine if specialist advice will be necessary to assist with the filing of complete and accurate forms. If foreign trust informational filings are being filed late, eligible clients should use the Delinquent International Information Return Submission Procedure. If the client receives penalty notices and abatement of the penalty is appropriate, obtain a power of attorney, obtain a hold on collection, and compose a thorough request for abatement applying the specific facts of the client's situation, considering the Boyle case, other case law, and the IRS's positions in Part 20 of the IRM.

Foreign trusts are also known as 'offshore trusts' or 'New Zealand exempt trusts'. Do you have questions about foreign trusts, Form 3520, or any other situations or forms mentioned in this article? If you need clarification on your rights and responsibilities as a US Citizen or Green Card Holder with tax issues regarding foreign assets, get expert advice from the international tax professionals at Taxes for Expats. If you fail to report Form 3520, you will be subject to as high of a fine as $10K fine for each foreign trust account you failed to report. In addition, each one of your foreign trusts may also be assessed with an equally punitive fee.

Such trusts are characterised by being revocable, or with the settlor having the sole right to income and gains in his or her lifetime. A foreign trust without either of these features will be a ‘Non Grantor’ trust. In this regard, U.S. foreign grantor trusts may be of benefit in certain circumstances where non-U.S. persons are passing wealth to beneficiaries who are subject to U.S. taxation. A foreign trust is a trust set up in New Zealand with New Zealand resident trustees, however the beneficiaries and settlor of the trust reside overseas (i.e. outside New Zealand's tax jurisdiction).

The clients at issue frequently hold their assets through Foreign Grantor Trusts which is a term used in the US Tax Code (S.672) to describe a trust which has US beneficiaries but which, while the non-US settlor is alive, is deemed to belong to that settlor. It is therefore not normally subject to US taxes on non-US assets, nor on income and gains on US assets, provided such US assets are held though a non-US holding entity.

To obtain an insight as to how the IRS approaches abatement of penalties based on reasonable cause and not due to willful neglect, practitioners should review Part 20 of the IRM. Well-placed, reasonable reliance on the advice of a qualified tax adviser likely will result in an abatement. Other mitigating factors that are highly relevant include a history of timely compliance with other filings, inclusion of the foreign trust income in properly filed income tax returns, and reasonably prompt filing of the late forms after determining the failure to timely file.

LLCs and their foreign owners, should be attached to Form 1120 (U.S. Corporation Income Tax Return). In addition to meeting these requirements, the U.S. grantors of foreign trusts may also need to file an FBAR, potentially in addition to filing Form 8938. As we mentioned in the previous section, trusts may be subject to FBAR reporting rules. In such cases, the trustee is responsible for filing an FBAR, which is typically due on the same day as income tax returns (i.e. non resident alien gift tax April 15, in most years). The primary IRS reporting vehicle for a foreign grantor trust is a Form 3520-A. Recently, the IRS issued Rev. Proc.

Whereas U.S. pension accounts are also trusts by nature are not treated as trusts for tax reporting purposes. If a limited liability company was formed in the United States, but is under the ownership of a foreign trust or non-U.S. person, it may be necessary to 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 ), which is generally due on April 15, in order to avoid Form 5472 penalties – which are substantial. Form 5472, which is used to disclose financial transactions involving U.S.

If you have a justifiable reason for not having filed Form 3520, it is up to the discretion of the IRS representative reviewing your file to reduce or completely reverse assessed penalties. If you had interest accumulation on your foreign trust account tax liability you will most likely be required to pay, as interest is a non-discretionary assessment applied to your IRS tax debt automatically. A great deal of foreign pension funds are considered foreign trusts.

Tax preparers need to proactively determine each year if a client who received a distribution was a grantor of or transferor to a foreign trust. Because of the March 15 due date for Form 3520-A, if a client is the grantor-owner of a foreign trust, this information must be acquired early in the calendar year.