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Article Written for:  TaxStringer, the NYSSCPA's (New York Society of Certified Public Accountants) 

U.S. citizens and residents are subject to a number of IRS reporting requirements regarding assets held outside the U.S. Foreign situs assets and interests in offshore trusts significantly complicate tax reporting. Several such filing requirements are outlined below.

Residents

Schedule B of Form 1040. The Internal Revenue Code generally requires U.S. citizens and resident non-citizens[1] to report all worldwide income, including income from foreign trusts and foreign bank and securities accounts on Form 1040. Part III of Schedule B (Foreign Accounts and Trusts) requires specific disclosure of foreign accounts, including the country in which each account is held.

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The Bank Secrecy Act (BSA) requires U.S. persons (any U.S. citizen, Green Card holder or any individual that satisfies the Code’s substantial presence test for residents) to disclose any financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account with a value exceeding $10,000. The BSA requires the U.S. person to annually report the account to the IRS on FinCEN Form 114. This FBAR is not filed with any tax return. The FBAR is filed on or before April 15 following the tax year during which the account was opened and (thereafter) owned.

FATCA Form 8938, Statement of Special Foreign Financial Assets. The Foreign Account Tax Compliance Act requires U.S. citizens, resident aliens and certain nonresident aliens to report specified foreign financial assets on Form 8938, if the aggregate value exceeds certain thresholds. Required reporting includes interests in any (1) financial account maintained by a foreign trust/entity; (2) stock or security issued by other than a U.S. person; (3) foreign entities; or (4) trust instrument or contract that has an issuer or counterpart that is not a U.S. person. Form 8938 must be filed with the individual’s U.S. income tax return for the tax year during which the asset was acquired and (thereafter) owned.

Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. U.S. citizens and residents must report all gifts received from (i) nonresident noncitizens (NRNCs) or any foreign estate, if exceeding $100,000 in the aggregate and (ii) foreign companies, if exceeding $16,649 (adjusted annually for inflation) in the aggregate. Gifts from related parties must be aggregated. For example, if a U.S. resident or citizen receives $60,000 from one NRNC and $50,000 from a different NRNC during the same year, and the two NRNCs are related, the U.S. person must report the gifts (as they aggregate to more than $100,000). The disclosure is made in Part IV of Form 3520. Gifts from foreign trusts are treated as trust distributions (reported in Part III of Form 3520). Form 3520 is filed separately from the U.S. income tax return. Form 3520 is due on the 15th day of the 4th month following the end of the U.S. person’s tax year. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month following the end of the U.S. person’s tax year.[2]

NRNCs


Form 1040NR, U.S. Non-Resident Alien Income Tax Return.  An NRNC individual or foreign trust (not disregarded for tax purposes), must file Form 1040NR, to disclose and pay tax on U.S. source income.[3]

Foreign Trusts

Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Any U.S. person who creates a foreign trust or who transfers property to a foreign trust (generally excluding independent service providers), must report the trust creation or funding on IRS Form 3520. The “owners” must disclose the taxpayer identification number of the foreign trust, the names of other persons considered owners of the trust, the Code section that treats the trust as owned by U.S. person(s), the country in which the trust was created and the date of creation. Form 3520 is due with the reporting U.S. person’s income tax return (for the year of trust creation or funding). Failure to file may subject the transferor to a penalty of 35% of the amount transferred to the trust. Form 3520 is required to be filed by any U.S. person who:

• Creates or transfers money or property to a foreign trust.
• Receives (directly or indirectly) any distribution from a foreign trust.
• Receives certain gifts or bequests from foreign entities.
• Is treated as the U.S. owner of a foreign trust. “Owners” include any U.S. person who creates a foreign trust or is treated as the owner of any assets held by the foreign trust under IRC §§671-679.

All gratuitous transfers to a foreign trust are reportable by the owner of the trust under I.R.C. §684 (on Form 3520A). If a U.S. owner of a foreign trust transfers property to the foreign trust at his death, or whose estate includes (for estate tax purposes) any portion of a foreign trust, the estate of the U.S. person must report the bequest on Form 3520. Form 3520 is due with decedent’s last income tax return. Failure to file may subject the executor to a penalty equal to 35% of the amount transferred.

A U.S. trust that becomes a foreign trust is required to report the change of status on Form 3520, with the trust’s income tax return covering the year of the transfer. Failure to file may subject the trust to a penalty equal to 35% of trust assets.

Cost payments, such as trustee fees, are not reportable. A beneficiary who receives a payment for services in excess of the market value of such services is, however, deemed to receive a distribution. Thus, if trustee fees paid to a beneficiary/trustee are excessive, the distribution becomes reportable. The reporting obligation is waived if the payee service provider reports the amount received as taxable compensation for services rendered.

Indirect and constructive distributions are also reportable on Form 3520A. For example, if a beneficiary uses a credit card and the trust guarantees or pays the invoice, the amount charged on the card is considered a distribution.

Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner. Form 3520-A provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person treated as an owner of the foreign trust. Each U.S. owner is responsible for causing the foreign trust to file Form 3520-A and furnish required annual statements to U.S. owners and beneficiaries. The foreign trust must file Form 3520-A on or before each March 15 following the reporting year.

Form 3520-A Foreign Grantor Trust Beneficiary Statement or a Foreign Non-Grantor Trust Beneficiary Statement.[4] Any U.S. person (including a grantor) who receives, directly or indirectly, any distribution from a foreign trust must report the name of the trust, the amount of distributions received from the trust, and such other information as the IRS may require.[5] If Form 3520-A is not filed, the U.S. owner may be liable for a penalty of 5% of the value of trust assets (deemed owned by each such owner).[6]

Schedule B of Form 1040 (Part III, Foreign Accounts and Trusts). Schedule B must be completed by any U.S. person who receives a distribution from, is grantor of, or a transferor to a foreign trust. Any U.S. person treated as the owner (within the meaning of Code §671) of a foreign trust is required to file an annual income tax return describing all trust activities and operations.[7]

Close coordination with an international tax advisor is imperative to ensure proper tax compliance for acquisition of foreign assets and funding of a foreign trust.


[1] See The Non-Citizen and the U.S. Estate and Gift Tax- An Introduction http://www.nysscpa.org/news/publications/the-tax-stringer/stringer-article-for-authors/the-non-citizen-and-the-u.s.-estate-and-gift-tax-an-introduction?utm_medium=email&utm_source=sharpspring&sslid=Mzc3NzA3NDAwNzcxBwA&sseid=MzK2tDCwMDM0MQcA&jobid=f81951e9-4aa4-4eed-8945-8487be3c54c2

[2] See IRC §6039F; IRS Notice 97-43.

[3] See Publication 519.

[4] See IRS Notice 97-34, describing the required information in detail.

[5] See IRC §6048(c).

[6] See IRC §6677.

[7] See IRC §6048(b).
 


Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought. 

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Gary A. Forster

Gary Forster is the managing partner and co-founder of ForsterBoughman.  His practice includes domestic and international corporate law, asset protection, tax, and estate planning. Gary handles a wide variety of corporate and personal planning matters.  Gary is the author of two books.  In 2013, he wrote Asset Protection for Professionals, Entrepreneurs and Investors, a guide to asset protection strategies for clients and their financial advisors, now in its second edition.  In 2020, he finished the second edition of The U.S. Estate and Gift Tax and the Non-Citizen, which explains how resident and non-resident foreign nationals are impacted by the U.S. Estate and Gift Tax.  Gary writes and lectures nationally to state bar and CPA groups on the topics of asset protection, international tax and corporate law.  He has also instructed classes at the University of Florida (Levin College of Law) and Rollins College (Crummer Graduate School of Business).  Gary’s articles can be found in such publications as the Florida Bar Journal and the American Bar Association’s Probate and Property Magazine.  Gary earned a B.A. from Tufts University, graduating cum laude with majors in Economics and Spanish Literature.  He received his J.D. from the University of Florida College of Law, graduating with honors.  Gary continued his studies as a graduate fellow at the University of Florida College of Law, Masters of Taxation program, earning an LL.M.  His education also includes studies at the University of Madrid, Oxford University and Leiden University in the Netherlands.  Gary is rated AV-Preeminent by Martindale-Hubbell and speaks Spanish fluently.

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