Short Primer on Foreign Trust Transaction Reporting to IRS

Short Primer on Foreign Trust Transaction Reporting to IRS

Foreign Trust Ownership Reporting to IRS

When it comes to international information reporting to the Internal Revenue Service, one of the most misunderstood aspects involves the disclosure of foreign trusts for US Persons. What makes the reporting so complicated, is that foreign trusts have different definitions and meanings depending on which country the foreign trust is located in. Whether it is a foreign trust designed to hide assets, an overseas pension plan, a minor’s trust, or an investment fund which is termed a ‘trust’ under foreign definition (which may differ from the US concept) — timely and accurate reporting is important. For the most part, foreign trusts are reported on Forms 3520 and 3520-A. Let’s go through five (5) important facts about foreign trust ownership reporting and distributions.

Reporting is Required on Forms 3520 and 3520-A

What it comes to reporting foreign trusts, the two main forms that may be required are Forms 3520 and 3520-A. While Form 3520-A is specifically for US owners of foreign trusts — Form 3520 is used for more than just foreign trust ownership. Form 3520 is also used to report large gifts and foreign trust distributions. The due dates for these forms are different as well, while Form 3520-AA is typically due on March 15th — and Form 3520 is generally required to be filed by April 15th – – but this is not always the case.

Foreign Trust Distributions are Reported on 3520

Even if a US person has no ownership of a foreign trust if they are a beneficiary of a foreign trust they still have to report the distributions that they receive each year on Form 3520. Typically, the beneficiary of a foreign trust who is not also an owner of the trust receives distributions from the foreign non-grantor trust — and these distributions are typically taxable under US tax law if the beneficiary is a US person for tax purposes.

Grantor Vs Non-Grantor Different Tax Rules

Grantor and Non-Grantor trusts are not treated the same for US Tax purposes. For the most part, income from a foreign grantor trust is taxed to the owner of the trust. If it is a US person, and they own the full trust then all of the income will be taxed to them, but if they are only a partial owner of the trust then generally they are taxed on their share of ownership of the foreign trust. In addition, if it is a foreign trust owned by foreign persons but the trust invests in US assets — the income may also be taxable to the foreign owners of the trust.

Exceptions under Revenue Procedure 2020-17 

In 2020, the Internal Revenue Service unleashed Revenue Procedure 2020–17, which eliminates the duplicate reporting on forms 3520 and 3520-A for several types of foreign tax-deferred trusts and foreign retirement tax-deferred trusts as well. In addition, if a taxpayer was already penalized for not filing forms 3520/352o-A but they qualify under this Revenue Procedure as possibly being exempt from reporting — then they may also be able to qualify for penalty abatement.

Noncompliance Amnesty with Offshore Disclosure

If a taxpayer is not properly reported therefore in trust in prior years they will want to consider getting into compliance for prior years’ non-reporting, before filing their current year – in order to avoid the quiet disclosure, which can lead to significant fines and penalties. The Internal Revenue Service has developed various amnesty options in order to safely assist tax players with getting into compliance for offshore assets, including the reporting of foreign trusts.

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