Reporting Obligations Beyond FBAR in Foreign Account Cases
Many taxpayers are aware of their FBAR requirement with respect to foreign financial accounts. In addition to the FBAR filing and requirement that you pay taxes on your worldwide income, you may have additional international tax reporting obligations if you have foreign accounts.
Foreign Accounts Set Up Through Nominee Entities
Many foreign accounts are set up through nominee entities, such as trusts, foundations, or companies in which the foreign account holder or the nominee holds shares. If a U.S. taxpayer has a relationship to one of these nominee entities, that information is required to be disclosed on the taxpayer’s income tax return on one of several different types of forms. For example, if a U.S. taxpayer receives a foreign gift or bequest from a foreign trust are reportable on Form 3520. A U.S. taxpayer who has ownership of a foreign company must report this relationship and ownership on a Form 5471.
Disclosure of Foreign Trust on Form 3520
Generally, a taxpayer who receives a distribution, foreign gift or bequest from a foreign trust, or who has a relationship with a foreign trust, must report those items on Form 3520 (1). Form 3520 is merely an information form, rather than a tax return (2). Additionally, gifts valued at more than $15,102 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships) must be disclosed on a Form 3520 (3).
Penalties for Failure to File Form 3520
Any taxpayer whose requirement to file Form 3520 is based on a transfer of property to a foreign trust or a distribution from a foreign trust may be subject to a penalty equal to 35% of the gross value of the property transferred to or received from the trust for failure to file on time. Similarly, taxpayers who receive large foreign gift are required to file Form 3520, and failure to do so on time may result in a penalty equal to 5%, or as much as 25%, of the value of the gift or bequest received.
Exceptions to the Form 3520 Requirement
Not all foreign trust distributions and relationships must be disclosure through Form 3520. Certain transfers to foreign trusts are excluded from the Form 3520 requirement, as described in IRC sections 402(b), 404(a)(4), or 404A (4). Many fair market value transfers from a U.S. taxpayer to a foreign trust are also excluded from Form 3520, although certain transactions may still apply. Transfers to foreign trusts that have current determination status from the IRS recognizing the trusts as exempt from income taxation under section 501(c)(3) do not need to be reported under Form 3520. Other exceptions may apply as well.
How a Tax Attorney Can Help with Offshore Reporting Requirements
If you have foreign accounts or interests in foreign trusts, or have received or transferred financial interests from foreign trusts, you may have reporting obligations of which you are not even aware. In order to fully understand and evaluate the options available to you and your complicated tax situation, you should consider working with an experience tax attorney.
The Tax Lawyer - William D. Hartsock has been successfully helping clients comply with U.S. International Tax Laws and deal with issues related to worldwide taxation since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.
References:
- Internal Revenue Service, Form 3520, http://www.irs.gov/pub/irs-pdf/f3520.pdf
- Internal Revenue Service, Gifts from Foreign Person, http://www.irs.gov/Businesses/Gifts-from-Foreign-Person
- Internal Revenue Service, Gifts from Foreign Person, http://www.irs.gov/Businesses/Gifts-from-Foreign-Person
- Internal Revenue Service, Instructions for Form 3520, http://www.irs.gov/pub/irs-pdf/i3520.pdf
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