Small Business Taxes & Management

Special Report

Foreign Trust Reporting Requirements


Small Business Taxes & ManagementTM--Copyright 2008, A/N Group, Inc.


Although there are legitimate reasons why a U.S. person might create a foreign trust, or have transactions with a foreign trust, they can have tax consequences and result in filing responsibilities as well. Regardless of your motivation, failure to meet these reporting and filing requirements can result in very significant penalties. For information on foreign trusts and grantor and nongrantor trusts and additional definitions and information, go to the IRS Web site Foreign Trusts.


General Rules

In general, the reporting rules apply to a U.S. person who:

Tax consequences can apply to the U.S. owners and U.S. beneficiaries of foreign trusts, and to the foreign trust itself.


Reporting Requirements and Tax Consequences

Information Returns

Form 3520--Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Who must file Form 3520? There are several situations in which a Form 3520 (or statement with similar information) is required to be filed. The most common circumstances are where a U.S. person:

The Form 3520 Instructions contain more detailed information about who must file a Form 3520; when, where, and possible penalties for late or incomplete filing.

Form 3520-A--Annual Information Return of Foreign Trust with a U.S. Owner. This form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.

Who Must File Form 3520-A? Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.

The Form 3520-A Instructions have more detailed information about who must file a Form 3520-A; when, where, and possible penalties for late or incomplete filing.


Other Possible Reporting 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.

TDF 90-22.1: Report of Foreign Bank and Financial Accounts--You might have to file this form if you have a financial interest in or signature authority over an account associated with a foreign trust.

Form 709 Gift Tax Return. A U.S. person who transfers money or property to a foreign trust may be required to file Form 709 United States Gift (Generation Skipping Transfer) Tax Return. See the Instructions for Form 709 for further information.

Form 1040NR--A foreign trust , which is not taxed to a U.S. owner as a grantor trust, may be obligated to file a Form 1040NR to pay U.S. tax on certain U.S. sourced income. See Publication 519 and the Instructions for Form 1040NR for additional information.


Income Tax Consequences


Compliance Issue

Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore.

A specialized industry has developed in attempting to circumvent these provisions. The promoters of offshore schemes often advance technical arguments which purport to show that their scheme is legal. These arguments are used to provide some comfort to their clients, who are then induced to enter into a scheme which usually involves concealing the true ownership and control of assets and income.

The filing and reporting responsibilities discussed here also apply to the beneficial owners of foreign trusts as well. The term beneficial ownership applies to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises.

For more information about offshore tax schemes just click on the following link: Abusive Offshore Tax Avoidance Schemes


Copyright 2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 08/12/08