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Archive for Form 3520/3520-A

Treasury Exempts Applicable “Tax-Favored Foreign Trusts” From The Form 3520… And Therefore Form 3520A Requirement

Form 3520 And Form 3520A

Introduction – A small step for forms, one giant leap for “formkind”

It’s true. Many Americans abroad will no longer have to file Form 3520 and Form 3520A to report their lives abroad! Early indications appear that many Americans will (assume their retirement vehicle does qualify as a trust) be required to report on Form 3520. This new initiative from Treasury a positive step in the right direction.

I have long thought that Treasury could solve many of the problems experienced by Americans abroad. Here is a wonderful example of Treasury taking the initiative to clarify the obvious:

Americans abroad do NOT use non-U.S. pension plans and non-U.S. tax-advantaged investing accounts to evade U.S. taxes. Hence, there is NO reason for the Form 3520 reporting requirement. This is an example of the tax compliance industry sitting down with Treasury, explaining a problem and getting a resolution. I suggest (and hope) that the same can be done for PFIC (Form 8621), Small Business Corporations (Form 5471) and other penalty-laden forms.

Yes, this announcement from Treasury in the form of RP 20-17 is a great achievement. Although it certainly doesn’t solve all the problems, it’s:

A small step for forms, one giant leap for “formkind”

The background to this problem – It starts in 1996 (same year as the beginning of the Exit Tax)…

Since 1996 Internal Revenue Code 6048 has required extensive reporting of almost any interaction with a foreign trust. Treasury has required that the reporting take place on Forms 3520 and 3520A. The forms are complex and subject to the draconian penalty regime described in Internal Revenue Code Section 6677. In order for an entity to be a foreign trust, it must be a trust. A “trust” for IRS purposes is defined by the Treasury Regulations as:

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The #FATCA Is Americans Abroad Are Subjected To A Far More Punitive Tax System Than Homeland Americans

JOHN RICHARDSON- FATCA, Form 3520-A

The purpose of this post is to continue the discussion generated by the “Open Letter To Democrats Abroad” (discussing the notion that “revenue neutrality” should be part of the “citizenship taxation” debate) and the “13 Reasons Why” (describing why Americans abroad are being forced to renounce U.S. citizenship.

Neither of those posts really described that fact that as ridiculous and unfair as “citizenship-based taxation” is, Americans abroad are “in effect” subject to a separate tax system than are Homeland Americans. A more extensive version of this post appeared at Tax Connections on March 13, 2019.

There are many instances where a U.S. citizen living abroad who earns his salary abroad, owns his assets abroad, has his pension abroad and is married to a non-U.S. spouse will pay higher U.S. taxes on income that is local to him than a comparable Homeland American would pay on income that is local to him.

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Form 3520 And Substitute Form 3520-A For Foreign Trusts And Gifts From Nonresidents

Gary Carter Form 3520-A

Section 6048 of the Internal Revenue Code requires a United States person, as defined for FBAR reporting, (and the executor of the estate of a US decedent) to file Form 3520 to report:

  • Certain transactions with foreign trusts,
  • Ownership of foreign trusts, and
  • Receipt of certain large gifts or bequests from certain foreign persons.

Additionally, an owner of a foreign trust might be required to file a Substitute Form 3520-A if the foreign trust fails to file Form 3520-A (See SUBSTITUTE Form 3520-A below). Here is Form 3520 and Instructions.

What Is a Foreign Trust For Which Form 3520 Must Be Filed?

Although the Internal Revenue Code (IRC) refers to trusts in numerous sections, nowhere in the IRC is the term “trust” actually defined. There is a definition of foreign trust. IRC Section 7701(a)(31)(B) says: “The term ‘foreign trust’ means any trust other than a trust described in subparagraph (E) of paragraph (30).” Subparagraph (E) describes “any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.”

So a foreign trust is one that is not under the jurisdiction of United States courts or controlled by a United States person. But what is a “trust”?

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IRS Form 3520-A: Annual Information Return Of Foreign Trust With A U.S. Owner

IRS
Future Developments

For the latest information about developments related to Form 3520-A and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form3520A.

Purpose of Form

Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671 through 679).

Who Must File

A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See Part II, line 22, of the Instructions for Form 3520. Otherwise, the U.S. owner may be liable for a penalty. See Penalties, later.

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From The Front Line: How A Routine Form 3520 Filing Can Easily Go Wrong – And Did!

IRS Form 3520

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. 

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We Want Taxpayers Lives Affected By Form 3520-A To Know Your Voices Are Making A Difference!

Action Alert

For those of you who may be unaware, an article written by Tax Consultant Gary Carter regarding personal experience helping a client with Form 3520 – A is having an impact.  Recently, I was copied on email from a powerful group who is paying attention. Although I am not at liberty to name the group at this time (I requested permission), an important fact to know is with the help of CPA Gary Carter and Lawyer John Richardson we are gaining attention and traction behind the scenes.

It all started with the letter written by member Gary Carter who wrote an article titled Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers. The purpose of my post today is to share some of the stories that have followed from this original article and to call out all tax professionals and taxpayers to help by sharing their experiences with us.

Here are the responses we have received and we encourage you to add your stories to the list so we can get help for all of you.

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We Are Searching For Victims Of IRS Form 3520 And 3520-A

A Form 3520

It all started with the letter written by one of our members, Gary Carter who wrote an article titled Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers. The purpose of my post today is to share some of the stories that have followed and to call out all tax professionals and taxpayers to help by sharing their experiences with us by commenting on this blog post. The more we can explain what is occurring with Form 3520 and 3520-A the more we are able to bring this issue to the attention of the IRS and NTA. We will start by sharing the stories and comments that have already surfaced but we need more to be impactful. Please share this with anyone you know and ask them to contribute to the comments on this post. Everyone counts so your input is valuable!

Here are some of the stories that have emerged:
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Taxpayers Traumatized By Form 3520 And 3520-A (Please Add Your Personal Stories After Reading This Post)

Kat Jennings

It all started with the letter written by one of our members, Gary Carter who wrote an article titled Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers. The purpose of my post today is to share some of the stories that have followed and to call out all tax professionals and taxpayers to help by sharing their experiences with us by commenting on this blog post. The more we can explain what is occurring with Form 3520 and 3520-A the more we are able to bring this issue to the attention of the IRS and NTA. We will start by sharing the stories and comments that have already surfaced but we need more to be impactful. Please share this with anyone you know and ask them to contribute to the comments on this post. Everyone counts so your input is valuable!

Here are some of the stories that have emerged:
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Foreign Trusts: IRS Continues To Issue Bogus Form 3520-A Penalty Notices – My Letter To The IRS

Gary Carter

When I was a kid we lived across the street from the Wolfermans. The Wolfermans got a dog. One day I was in my yard, and their dog was barking. Mr. Wolferman came out, clapped his hands and called the dog. The dog joyfully bounded to Mr. Wolferman. Mr. Wolferman then proceeded to spank the dog, apparently for barking. I remember thinking what a fool Mr. Wolferman was for doing that – the dog would never come to him again when called.

A couple of weeks ago I described the traumatic experience of a client who had received a $10,000 penalty notice from the IRS for a completely invalid purpose. As the owner of a foreign trust, my client had done all she could have done to comply with the filing requirements of a foreign trust owner. She was compliant, yet was slapped with a $10,000 penalty. See Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers!

Since then, I have learned firsthand of dozens of similar notices, and I suspect there have been thousands issued for the same invalid purpose. Then, this week, another client contacted me about receiving the exact notice under the exact circumstances.

Below is the letter I wrote to the IRS on behalf of the client who received the latest notice. The recipients of these notices represent  foreign trust owners who are doing their best to obey the law (the Wolfermans’ dog) only to be punished by a formidable but misguided tax collection agency (Mr. Wolferman). Would one blame the dog for wandering off to find someone kinder and wiser to pledge allegiance to (as in expatriation)?

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From The Front Line: How A Routine Form 3520 Filing Can Easily Go (Eye-Watering Expensively) Wrong – And Did

HELEN BURGGRAFF

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.

Read more