IF YOU CREATE OR ARE A BENEFICIARY OF A FOREIGN TRUST (AND MANY FOREIGN PENSION PLANS) YOU MUST REPORT TO THE IRS OR PAY PENALTIES

General Rules

A U.S. person includes a citizen of the United States, a domestic partnership, a domestic corporation, any estate other than a foreign estate, any trust if a U.S. person exercises primary supervision over the administration of the trust or if one or more U.S. persons have the authority to control all substantial decisions of the trust, and any person that is not a foreign person.

Tax consequences can apply to U.S. persons who are treated as owners of a foreign trust and U.S. persons treated as beneficiaries of a foreign trust, and to the foreign trust itself. There can be income tax as well as transfer tax consequences that should be considered.

In addition to tax consequences, there a number of information reporting rules that can apply to a U.S. person who enters into transactions with a foreign trust or is treated as an owner of a foreign trust under the grantor trust rules of Internal Revenue Code (IRC) sections 671-679, including information reporting on Forms 3520 and 3520-A; on Form 8938, Statement of Specified Foreign Financial Assets; and on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

This page focuses on information reporting requirements on Forms 3520 and 3520-A (under IRC section 6048), as well basic income tax considerations. 

Income Tax Consequences

• U.S. owner of a foreign trust - In general, a U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (IRC sections 671-679) is taxed on the income of that trust. IRC section 679 applies specifically in the context of foreign trusts and will treat as an owner of a foreign trust a U.S. person who transfers assets to a foreign trust which has or is presumed to have a U.S. beneficiary. Each U.S. owner of a foreign trust should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3) from the foreign trust, which includes information about the foreign trust income they must report.
   
• U.S. beneficiary of a foreign trust – In general, a U.S. beneficiary of a foreign non grantor trust will report its share of foreign trust income.  Depending on whether the U.S. beneficiary is a beneficiary of a grantor or non grantor trust, the beneficiary should receive a Foreign Grantor Trust Beneficiary Statement or a Foreign Non Grantor Trust Beneficiary Statement, which includes information about the taxability of distributions the beneficiary has received.
   
• U.S. transferor of assets to a foreign non grantor trust - IRC section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust by a U.S. person.

Information Reporting

Form 3520

In general, a Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts is required to be filed when a U.S. person:

• creates or transfers money or property to a foreign trust or makes a loan to a foreign trust;
• receives distributions from a foreign trust, receives the uncompensated use of property of a foreign trust, or receives a loan from a foreign trust;
• is treated as the U.S. owner of a foreign trust under the grantor trust rules; and
• receives certain large gifts or bequests from foreign persons.

The instructions for Form 3520 include more information about:

1. who must file a Form 3520;
2. when and where the Form 3520 must be filed; and 
3. possible penalties for filing the Form 3520 late or filing incomplete or inaccurate information. 

See Form 3520 filing tips below. See also Gifts from Foreign Persons for information about reporting receipts of certain large gifts or bequests from certain foreign persons.

Form 3520-A

In addition to Form 3520, U.S. persons who are treated as owners of a foreign trust under the grantor trust rules must ensure that the foreign trust timely files a complete and accurate Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner , and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. If a foreign trust fails to file Form 3520-A, the U.S. owner must: 

1. complete and attach a substitute Form 3520-A to a timely filed Form 3520, and
2. furnish the required annual statements in order for the U.S. owner to avoid penalties for the foreign trust’s failure to file a Form 3520-A.

The instructions for Form 3520-A include more information about: 

1. who must file a Form 3520-A or ensure that a Form 3520-A is filed; 
2. when and where the Form 3520-A must be filed; and 
3. possible penalties for filing Form 3520-A late or filing incomplete or inaccurate information. The instructions for Form 3520-A and Form 3520 also provide information about filing a substitute Form 3520-A.

Exceptions to filing Forms 3520 and 3520-A

Forms 3520 and 3520-A are not required to be filed for Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs).  See Rev. Proc. 2014-55 (PDF). In addition, Forms 3520 and 3520-A are not required to be filed for certain tax-favored foreign retirement trusts or tax-favored foreign non-retirement savings trusts, provided that the U.S. owner is an “eligible individual” and the tax-favored foreign trust meets certain requirements. See Rev. Proc. 2020-17 (PDF).  Caution: These exceptions do not affect any reporting obligations that a U.S. person may have to report specified foreign financial assets on Form 8938 or any other reporting requirement, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Form 3520 and Form 3520-A filing tips to avoid penalties

• Form 3520
  • File Form 3520 by the 15th day of the fourth month following the end of the U.S. person’s tax year, or April 15th for calendar year taxpayers, subject to any extension of time to file that may apply. If you are a U.S. citizen or resident who lives outside the Unites States and Puerto Rico or if you are in the military or naval service on duty outside the United States and Puerto Rico, then the due date to file a Form 3520 is the 15th day of the 6th month following the end of the U.S. person’s tax year.
  • If an extension was filed with respect to your income tax return, be sure to check Form 3520, Box 1k, and enter the form number of the income tax return to avoid your Form 3520 being treated as filed late.
     
• Form 3520-A
  • File Form 3520-A using an Employer Identification Number (EIN) for the foreign trust on Line 1b of the form rather than the U.S. owner’s SSN or ITIN. If the foreign trust does not have an EIN, refer to How to Apply for an EIN.
  • File Form 3520-A by the 15th day of the 3rd month after the end of the trust’s tax year.  An automatic 6-month extension may be granted by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns. Form 7004 must be filed under the foreign trust’s EIN.
  • If the foreign trust will not file a Form 3520-A, the U.S. owner of the foreign trust must file a substitute Form 3520-A by completing a Form 3520-A to the best of their ability and attaching it to a timely filed Form 3520, including extensions (see Form 3520 and Form 3520-A instructions for more information on filing a substitute Form 3520-A). Do not separately file a duplicate Form 3520-A if you are filing a substitute 3520-A.

Other Possible Filing Requirements

Form 1040, Schedule B, Part III, Foreign Accounts and Trusts, must be completed if you receive a distribution from, or were grantor of, or a transferor to a foreign trust.

If you transfer money or property to a foreign trust, you may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

A foreign trust, which is not taxed as a grantor trust, may be required to file a Form 1040-NR, U.S. Nonresident Alien Income Tax Return  to pay U.S. tax on certain U.S. sourced income. See Publication 519, U.S. Tax Guide for Aliens and the instructions for Form 1040-NR for additional information.

You may be required to file Form 8938, Statement of Specified Foreign Financial Assets, to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than certain reporting thresholds.

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account each year to the Internal Revenue Service by filing FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR).

If you need tax assistance with respect to foreign trust and pension plans from US Attorney and CPAs with the knowledge and expertise on these matters email us HERE

DRAMATIC INCREASE IN US EXPATRIATES SURRENDERING THEIR CITIZENSHIP (AND TAX FILING REQUIREMENT WITH THE IRS) -HERE ARE LEGAL RULES - THERE ARE ALSO SEPARATE AND COMPLEX IRS TAX RULES

 

 A. THE IMMIGRATION & NATIONALITY ACT  Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) is the section of law governing the right of a United States citizen to renounce abroad his or her U.S. citizenship. That section of law provides for the loss of nationality by voluntarily and with the intention of relinquishing nationality: "(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State."

B. ELEMENTS OF RENUNCIATION A person wishing to renounce his or her U.S. citizenship must voluntarily and with intent to relinquish U.S. citizenship: appear in person before a U.S. consular or diplomatic officer, in a foreign country at a U.S. Embassy or Consulate; and sign an oath of renunciation Renunciations abroad that do not meet the conditions described above have no legal effect. Because of the provisions of Section 349(a)(5), U.S. citizens can only renounce their citizenship in person, and therefore cannot do so by mail, electronically, or through agents. In fact, U.S. courts have held certain attempts to renounce U.S. citizenship to be ineffective on a variety of grounds, as discussed below. Questions concerning renunciation of U.S. citizenship in the United Statespursuant to INA section 349(a)(6) must be directed to United States Citizenship and Immigration Services (USCIS) of the Department of Homeland Security. 

 C. REQUIREMENT - RENOUNCE ALL RIGHTS AND PRIVILEGES A person seeking to renounce U.S. citizenship must renounce all the rights and privileges associated with such citizenship. In the case of Colon v. U.S. Department of State, 2 F.Supp.2d 43 (1998), the U.S. District Court for the District of Columbia rejected Colon’s petition for a writ of mandamus directing the Secretary of State to approve a Certificate of Loss of Nationality in the case because, despite his oath of renunciation, he wanted to retain the right to live in the United States while claiming he was not a U.S. citizen. 

 D. DUAL NATIONALITY / STATELESSNESS Persons intending to renounce U.S. citizenship should be aware that, unless they already possess a foreign nationality, they may be rendered stateless and, thus, lack the protection of any government. They may also have difficulty traveling as they may not be entitled to a passport from any country. Statelessness can present severe hardships: the ability to own or rent property, work, marry, receive medical or other benefits, and attend school can be affected. Former U.S. citizens would be required to obtain a visa to travel to the United States or show that they are eligible for admission pursuant to the terms of the Visa Waiver Program. If unable to qualify for a visa, the person could be permanently barred from entering the United States. If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance purposes, the individual will be found inadmissible to the United States under Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)), as amended. Renunciation of U.S. citizenship may not prevent a foreign country from deporting that individual to the United States in some non-citizen status.

 E. TAX & MILITARY OBLIGATIONS /NO ESCAPE FROM PROSECUTION Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations . You must file special forms and final tax returns with the IRS to avoid having to file taxes in the future. In addition, the act of renouncing U.S. citizenship does not allow persons to avoid possible prosecution for crimes which they may have committed or may commit in the future which violate United States law, or escape the repayment of financial obligations, including child support payments, previously incurred in the United States or incurred as United States citizens abroad.

 F. RENUNCIATION FOR MINOR CHILDREN/INDIVIDUALS WITH DEVELOPMENTAL OR INTELLECTUAL DISABILITIES Citizenship is a status that is personal to the U.S. citizen. Therefore parents may not renounce the citizenship of their minor children. Similarly, parents/legal guardians may not renounce the citizenship of individuals who lack sufficient capacity to do so. Minors seeking to renounce their U.S. citizenship must demonstrate to a consular officer that they are acting voluntarily, without undue influence from parent(s), and that they fully understand the implications/consequences attendant to the renunciation of U.S. citizenship. Children under 16 are presumed not to have the requisite maturity and knowing intent to relinquish citizenship; children under 18 are provided additional safeguards during the renunciation process, and their cases are afforded very careful consideration by post and the Department to assess their voluntariness and informed intent. Unless there are emergent circumstances, minors may wish to wait until age 18 to renounce citizenship.

 G. IRREVOCABILITY OF RENUNCIATION Finally, those contemplating a renunciation of U.S. citizenship should understand that the act is irrevocable, except as provided in section 351 of the INA (8 U.S.C. 1483), and cannot be canceled or set aside absent a successful administrative review or judicial appeal. Section 351(b) of the INA provides that an applicant who renounced his or her U.S. citizenship before the age of eighteen (or lost citizenship related to certain foreign military service under the age of 18) can have that citizenship reinstated if he or she makes that desire known to the Department of State within six months after attaining the age of eighteen. See also Title 22, Code of Federal Regulations, section 50.20. See also Section 50.51 of Title 22 of the Code of Federal Regulations regarding the administrative review of previous determinations of loss of U.S. citizenship. Renunciation is the most unequivocal way by which a person can manifest an intention to relinquish U.S. citizenship. 

In addition to the legal rules set forth above, you must also separately comply with the IRS rules to achieve your goal of no longer filing US tax returns and paying US taxes. Those rules are complex and require filing the form 8854 along with a final tax return. We have counsel hundred of clients in this procedure and assisted them filing the required forms with great success for over 10 years. Contact us if you need assistance and help. We are CPAs and Attorneys and can provide you with ALL of the expertise you need.  Our next blog post will discuss the Tax requirements adn rules. EMAIL US WITH QUESTIONS FOR FOR HELP

Here’s what expat taxpayers need to know about the home office deduction

The home office deduction allows qualifying taxpayers to deduct certain home expenses on their tax return. With more people working from home than ever before, some taxpayers may be wondering if they can claim a home office deduction when they file their 2020 tax return next year.  

Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

• Employees are not eligible to claim the home office deduction. 
• The home office deduction Form 8829 is available to both homeowners and renters.
•  There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
• Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
• The term "home" for purposes of this deduction:
  • Includes a house, apartment, condominium, mobile home, boat or similar property.
  • Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
  • Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
•  There are two basic requirements for the taxpayer’s home to qualify as a deduction:
  • There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
  • The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
• Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.
  
• Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
  
• The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
• When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.
• Contact us at ddnelson@gmail.com if you need assistance or further information. We are one of the most experienced international and expatriate CPA firms and Attorneys on the Web. Visit our website at www.taxmeless.com