What are the requirements for an arrangement to qualify as a “trust” under the Internal Revenue Code?

1. Definitions are found in Internal Revenue Code 7701.

2. Treasury Reg. 301.7701-4(a) defines a trust as for Internal Revenue Code purposes as:

“an arrangement created either by will or inter vivos declaration whereby trustees take title to property for the purpose of protecting and conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts . . . . Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit”

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Gary Carter

The IRS Office of Associate Chief Counsel (International) has agreed to investigate an erroneous penalty campaign by the IRS targeting foreign trust owners who have timely filed Substitute Form 3520-A. If you  have clients who have received one of these Form 3520-A penalty notices, we need your input.

The IRS would like specific information from taxpayers who have been targeted, so I have created a password protected information form to distribute to practitioners.  Your client (or you) should complete the form, save it, then open it to ensure the data is there before sending it back to me. Request Form from me at


Out of frustration with the IRS, I published a blog article last summer describing my experience with one of my clients who had received a $10,000 penalty notice for Form 3520-A after properly filing the form. The comments and reactions to the article have indicated the problem is systemic and pervasive, potentially affecting thousands of taxpayers. The Taxpayer Advocate office has been unable to help.

I happened to sit next to Mark Koziel, Executive Vice President of the AICPA at a dinner in October. I described the problem to him. He sent my article to Eileen Sherr with the AICPA Tax Policy & Advocacy Team.

On November 15, the AICPA Trust, Estate and Gift Tax Technical Resource Panel met with IRS representatives from the Office of Associate Chief Counsel and described the issue. The IRS attorneys then had a call with the IRS processing and penalty groups responsible for these penalty notices and relayed our concerns. The processing and penalty groups agreed to a follow up call with the AICPA in January to address the issue, but first wanted to get details about individuals affected.

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John Richardson

There is evidence from both tax practitioners and from individuals that Americans abroad are suffering from a “Form 3520A” penalty epidemic. Some of the best discussion of both the scope and technicalities of this problem may be found at Tax Connections. See particularly the posts herehere and here. (Mr. Carter’s original post was also reproduced at American Expat Finance.) The posts have attracted commentary from a number of tax professionals. The IRS Taxpayer Advocate has been invited to intervene.

“Tax Compliant” Americans Abroad are just a penalty waiting to happen!

Americans abroad are potentially required a very large number of IRS forms. My point is simple. It’s the “possible” requirement to file International Information Returns that makes Americans abroad so vulnerable to the IRS penalty regime. As I commented at Tax Connections:

The only reason that the Form 3520A penalty was imposed was because a Form 3520 was filed!

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