The IRS has provided on its website a summary of reporting requirements for foreign trusts and their U.S. owners. Though these regulations are not new, this summary is a helpful and concise resource for filers to consult.
As summarized on the IRS website, under U.S. federal tax laws, any “U.S. person” who creates or has transactions with a foreign trust may be subject to taxation or informational reporting requirements in the U.S. An individual is considered to be a U.S. person if he or she is a U.S. citizen or resident. However, entities such as partnerships, corporations, or estates or trusts domiciled in the U.S. can also be considered U.S. persons. In regard to foreign trusts, not only may a trust itself be subject to tax in the U.S., but U.S. owners or beneficiaries of a foreign trust may be subject to tax, as well.
A U.S. person who substantially controls or owns a foreign grantor trust with U.S. beneficiaries by means of asset transfer will be subject to tax on the trust’s income, and on any gain from the appreciation of assets transferred.
Any U.S. person who owns substantially controls or is a beneficiary of a foreign trust as explained above must file Forms 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Owners of foreign grantor trusts must also file an informational return annually with the IRS, Form 3520-A, including a complete accounting of the foreign trust’s activities and operations in that tax year. This information must also be provided to all trust owners and beneficiaries.
In addition to these two primary foreign filings, other potential filing requirements include Form 709, Form 1040 Schedule B, Form 1040-NR, Form 8939, and FinCEN Form 114.
The U.S. owners of a foreign trust are responsible for filing required Forms by the 15th day of the fourth month following the end of the U.S. person’s tax year. Extensions of time to file are available. Failure to timely file these forms, or incomplete filing, may subject owners to a penalty of $10,000 or 5% of the gross value of the trust assets owned by a U.S. person, whichever is greater. Additional penalties may also be imposed.
As U.S. tax advisors at Schneider Downs, we frequently help taxpayers who have either misreported or misunderstood their foreign filing requirements, avoiding costly tax consequences and headaches for our clients. If you think you may be required to file any of the above forms or have additional questions, please contact us.
