Foreign Trust (3520A) – U.S Agent & Confidentiality | IRS Trust Reporting
Foreign Trust (3520A) – U.S Agent & Confidentiality | IRS Trust Reporting
Form 3520-A is an Annual Information Return of Foreign Trust With a U.S. Owner.
We represent numerous clients worldwide who have offshore trusts or foreign trusts. Typically, these clients may have a foreign trust in a country such as New Zealand, A Sociedad Anonima for Estate Planning purposes in Costa Rica, and/or a Foundation in a country such as Panama (while a Panamanian foundation is not per se a foreign trust under US tax law, most US persons who have Panamanian foundations prefer to file a form 3520/3520-A instead of a 5471, due to potential tax benefits).
While one of the main benefits of having a foreign trust is the idea of anonymity and confidentiality (either real or perceived), that confidentiality or anonymity can be easily destroyed in situations in which there is not at least one U.S. Agent, who serves as a member of the trust.
Why? Because as you will see, when using form 3520-A (reporting a foreign trusts), if the foreign trust does not have a U.S. Agent there is typically a much more in depth reporting document disclosure requirement necessary to appease the IRS.
When it comes to foreign trusts, one of the best ways to avoid having to disclose specific information about the trust is to appoint a US agent.
What is a U.S. Agent?
As provided by the IRS, a U.S. agent is a U.S. person that has a binding contract with a foreign trust that allows the U.S. person to act as the trust’s authorized U.S. agent (see the instructions for Part I, Lines 3a through 3g, later) in applying sections 7602, 7603, and 7604 with respect to:
– Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed, or required to be taken into account under the grantor trust rules, with respect to a foreign trust; or
– Any summons by the IRS for such records or testimony.
– A U.S. grantor, a U.S. beneficiary, or a domestic corporation controlled by the grantor or beneficiary may act as a U.S. agent. However, you may not treat the foreign trust as having a U.S. agent unless you enter the name, address, and taxpayer identification number of the U.S. agent on lines 3a through 3g of Part I of the form. See Identification numbers, later.
– If the person identified as the U.S. agent does not produce records or testimony when requested or summoned by the IRS, the IRS may redetermine the tax consequences of your transactions with the trust and impose appropriate penalties under section 6677.
– The agency relationship must be established by the time the U.S. person files Form 3520-A for the relevant tax year and must continue as long as the statute of limitations remains open for the relevant tax year. If the agent’s responsibility as an agent of the trust is terminated for any reason (for example, agent’s resignation, agent’s liquidation, or agent’s death), see section IV(B) of Notice 97-34.
What if There is No U.S. Agent?
If the trust did not appoint a U.S. agent, the trustee (or whomever is completing the Form 3520-A) must provide copies of the list of documents set forth on page one of Form 3520-A.
It is important to note, that (under most circumstances) these forms are not forms that you are going to want to volunteer to the IRS.
Specifically, the IRS requires the trust to provide:
- Summary of all written and oral agreements and understandings relating to the trust
- The trust instrument
- Memoranda or letters of wishes
- Subsequent variances to original trust documents
- Other trust documents
Example: Panamanian Foundation
For anyone who has ever seen or otherwise been associated with a Panamanian foundation, they understand the benefits of anonymity. Without getting too detailed, the IRS has not specifically stated whether a Panamanian foundation is considered to be a corporation or trust, and therefor (again, under most circumstances and due to the tax benefits) a Panamanian foundation is operated as a trust.
Moreover, in many circumstances the U.S. Beneficiary of the Panamanian foundation uses a foreign trustee to prepare all the documentation. Etc.
Much of the information regarding the beneficiaries (usually US persons) is a separate document not necessarily contained specifically in the text of the foundation document. And, if the Panamanian foundation appointed a US agent – then the above referenced forms do not need to be filed along with question 2 of Form 3520-A.
Alternatively, if there is no US agent, then these forms have to be filed. And, typically with a Panamanian foundation there are additional documents or memoranda which supplement the main document and usually includes references to the beneficiaries, percentage of ownership, etc. which you do not want to provide.
Just Because There is a U.S. Agent…
… Does not mean the IRS is going to contact them or would have any need to do so. In other words, it is a risk analysis: is it better to not appoint a US agent but to include all these different portions of the trust document that you otherwise do not want to include, or is it better to appoint a US agent, not submit the additional documentation, and hope it goes into the black hole in which you are never audited or contacted by the IRS – and the information contained within the trust (absent an audit) remains confidential?
This is an analysis you should perform with an experienced Offshore Disclosure Attorney before making any affirmative representation to the IRS.
Speak with an Experienced Offshore Disclosure Lawyer
If you are considering getting into IRS offshore compliance through voluntary disclosure, and the Form 3520-A is one aspect of your compliance requirements, this gives you a glimpse into how complicated and overwhelming Offshore Disclosure can get.
It is important to use an experienced offshore disclosure attorney to bring you into compliance.
What is an Experienced Offshore Disclosure Attorney?
You want to make sure you use an OVDP Attorney who has:
- Litigation Experience
- IRS Audit Experience
- At Least 15 years of Attorney Experience
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.
Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experienced mentioned above) flubbed their submission and made numerous mistakes in the submission process.
Alternatively, once you are in OVDP, you may want to:
- Make an MTM Election
- Argue FAQ 55 Penalty Reductions
As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.
OVDP Attorney Fees
If you receive an OVDP Fee Quote from a CPA or Attorney that seems too Low…you should be careful.
That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”
They will provide artificially low fee quotes to bait you in, only to request more money down-the-line. Most of the these Attorneys do not have real experience, and do not understand the comprehensive nature of an OVDP.
Golding & Golding, A PLC
At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.
In order to assist you to better understand the distinction between the two different IRS offshore/foreign account disclosure programs, we are providing the following summary for your reference.
We Can Help You!