It is perhaps not surprising to hear that non-U.S. (or “foreign”) trusts with U.S. owners can be tricky…
Individual U.S. citizens who hold such foreign trusts, for example, are expected to file a Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” and the trusts themselves are required to file a Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner,” every year. If the trust doesn’t file a Form 3520-A, the U.S. owner of the trust is required to file a “substitute” Form 3520-A with their Form 3520. Definitely not for beginners.
Still, Gary W. Carter, a certified public accountant based in Minnesota, with decades of experience as a tax adviser, professor and revenue agent, knew all this. So he filed such forms on behalf of some of his overseas clients last year without a further thought.
Below, Carter explains, in his own words, how easily – and disastrously – things went wrong for five of his clients (“so far”, he says), and speculates that the scale of similar penalty notices could be huge: and consequently, a huge, if not a particularly tax-payer-friendly, money-maker for the IRS.