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Beneficiary of a Foreign Trust? You Have Reporting Requirements!

In recent months, the Internal Revenue Service has continued to increase its scrutiny of offshore accounts and entities, as evidenced by the government’s recent high-profile cases against UBS, and over 15,000 US residents admitting to hiding money in foreign bank accounts.  While foreign bank account reporting has been grabbing the national headlines, transactions to and from foreign trusts have their own set of information reporting requirements, and, like all areas concerning offshore activities, have hefty civil and criminal penalties for failure to file the required returns.

What Transactions Have Filing Requirements?
Transactions to and from foreign trusts are reportable on a Form 3520. While there are a number of situations that would require a filing of Form 3520, the most common circumstances that would require a filing are situations in which a United States person:

1. Creates or transfers money or property to a foreign trust
2. Receives any distributions from a foreign trust or,
3. Receives more than $100,000 in gifts or bequests from a foreign entity.

In addition, any United States person who is considered to be the owner or grantor of a foreign trust needs to ensure that the trust files a Form 3520-A every year to report the trust’s activity for the taxable year. A United States person would be considered to be the owner or grantor of a foreign trust with respect to any property transferred into the trust.

For purposes of filing both Form 3520 and Form 3520-A, a United States person includes:

1. A citizen or resident alien of the United States
2. A domestic partnership
3. A domestic corporation, or
4. A domestic estate or trust.

What are the penalties for not filing?
The penalties for failure to file timely or for filing incomplete or incorrect forms are severe:

1. Failure to report the transfer of money or property to a foreign trust – penalty is 35% of the gross value of the money or property transferred
2. Failure to report distributions received  from a foreign trust – penalty is 35% of the gross value of any distributions received
3. Failure to report gifts or bequests in excess of $100,000 from a foreign entity – penalty is 5% per month of the gifts or bequests received, up to a maximum of 25%
4. Failure to file a Form 3520-A reporting the activity and income of the foreign trust – penalty is 5% of the total assets of the trust

In addition to the penalties described above, a taxpayer who fails to file or files an incorrect return can be subject to criminal penalties.

The rules for foreign information reporting are complex. If you believe you may have a filing requirement, or have any questions on foreign information reporting, please contact Teri Newman at 312-980-2926.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.