Undisclosed Foreign Trust (Form 3520-A) as a Criminal Tax Matter?

Can an Undisclosed Foreign Trust (Form 3520-A) Turn Criminal

In general, when a US Person fails to report the ownership of a foreign trust on Forms 3520 and 3520-A, the resulting penalties (if any) are civil in nature. In other words, the penalties are limited to monetary penalties. Sometimes, when a person fails to file a Form 3520/3520-A to report foreign trusts, it could spill over into a criminal tax violation. While the number of criminal tax prosecutions is limited, the IRS has significantly increased enforcement of foreign-related compliance matters, especially on matters involving FBAR Reporting and Expatriation. Let’s take a brief look at what the IRS provides for a missed Form 3520-A.

Criminal Penalties for 3520-A

As provided by the IRS:

• • • Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.

26 USC § 7203 – Willful Failure to File Return

• • • Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.

    • In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.

26 U.S. Code § 7206 – Fraud and False Statements

(Pertinent parts 1 and 2)

• • • (1) Declaration under penalties of perjury

      • Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

    • (2) Aid or assistance

      • Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document;

26 U.S. Code § 7207 – Fraudulent Returns, Statements, or other Documents

• • • Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

    • Any person required pursuant to section 6047(b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

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