International Trust IRS Reporting Rules – U.S. Tax, Assets & Accounts
- 1 The Grantor May Still Be Taxed
- 2 Form 3520-A Reporting
- 3 Does the Trust Have Foreign Accounts?
- 4 Be Proactive, Get Into Compliance with Offshore Disclosure
- 5 Penalties
- 6 Get Into Compliance with IRS Offshore Disclosure
What are the International Trust IRS Reporting Rules for U.S. Tax, Assets & Accounts?
An International Trust (aka Foreign Trust or Offshore Trust) usually means a trust that is located outside of the United States (or subject to law in a jurisdiction outside of the United States) and is owned at least in part by U.S persons.
When a person has ownership of an International Trust, they still have significant US reporting requirements, even though the trust may be governed by a country that is not the United States.
Oftentimes, a person will have to report their trusts on various different forms, including a form 3520 and 3520-A.
The following is a summary of a few facts you should keep in mind when owning or serving in any other capacity of the foreign trust.
The Grantor May Still Be Taxed
In a foreign trust, the grantor or the person who usually created trust is taxed on the income. Thus, even if the grantor does not receive the income, and a grantor foreign trust the grantor will still be taxed.
The main purpose behind this law is so that wealthy individuals cannot simply shift income to less wealthy individuals who would receive the income at a lower tax rate.
For example, David is in the top tax bracket and would be taxed at 39.6% on his non-passive income. If David was to create a foreign grantor trust and then provide income to his two nephews, who are just getting started on their careers, the two nephews would only pay somewhere between 10 and 15% tax on the same money. Therefore, under the general propositions, David would still be taxed on the income.
*Sometimes this is done purposefully and it’s called an intentionally defective grantor trust (IDGT)
**Some Passive Trust Income may be taxed at a reduced rate.
Form 3520-A Reporting
A Form 3520-A is called Annual Information Return of Foreign Trust With a U.S. Owner. Typically, if the trust has a US owner, then the US owner is deemed responsible for ensuring that the forms filed. Usually, it would be the foreign trustee the files form on behalf of the trust.
But, often times a person initiates or creates a foreign trust because he or she does not want to be detected by the United States. Therefore, it is not uncommon for foreign trusts in foreign countries to have not done any reporting to the United States.
Therefore, even if you are the owner of a foreign trust and are using a Trust Company that you believed was filing the form and keeping your compliance – you should double check.
Why? Because it is not the trustee that would get in any trouble with the United States since they may be operating outside of the US reach. Rather, you would be fine and penalized heavily for the noncompliance.
Does the Trust Have Foreign Accounts?
Oftentimes, a foreign trust will also have a foreign bank account or multiple financial accounts associated with it (and/or assets). For example, you may be one of multiple owners of a family foreign trust in a different country.
That trust may have multiple bank accounts in which income or other funds are being held. Moreover, you may also have personal authority over the account, either individually, or as one of the beneficiaries, trustors, or trustees of the trust.
As such, if you have access to the money and you can withdraw it, then chances are the US government would also consider you an owner (or at least signatory) of the account.
And, if the foreign accounts in total (either associated with this trust or otherwise associated to you) have an annual aggregate total that exceeds $10,000 on any day of the year, then you may be required to file an FBAR (Report of Foreign Bank and Financial Accounts).
If you do not file this form timely or properly, the US government has the right to penalize you very heavily on the non-filing. And, if the U.S. government believes you acted willful or with reckless disregard,vthe IRS could come back and try to penalize you 100% value of the foreign accounts in a multiyear audit situation.
Therefore, if you have any interest in or ownership of a foreign trust, it is important to remain in compliance to avoid potentially devastating penalties that the IRS may issue against you.
Be Proactive, Get Into Compliance with Offshore Disclosure
The IRS offshore voluntary disclosure programs are programs designed to bring people safely into compliance. Depending on the facts and circumstances of a person’s case will help determine which offshore disclosure program may qualify for.
By entering the program, a person may avoid even more excessive fines and penalties in accordance with US taw law.
If you are found to be willful and intentionally misrepresented your case to the IRS, you may be subject to extremely high fines and penalties beyond what you may have already paid.
The following is a summary of penalties as published by the IRS on their own website:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.