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Forms 3520 and 3520-A and Increased Use of Foreign Trusts

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The Internal Revenue Service recently released its Statistics of Income Studies (SOI) reports concerning data for 2010 foreign trusts that have U.S. persons as grantors, transferors, or beneficiaries. The data shows that, despite the various compliance costs associated with reporting requirements, use of foreign trusts by U.S. taxpayers continues to increase.

This article will briefly explain Form 3520 and Form 3520-A, and highlight some of the newly released SOI data relating to such forms. The article is not intended to constitute tax or legal advice. US-International taxation and foreign trusts can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters.

Form 3520

The purpose of Form 3520 (“Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts”) is for U.S. persons (and executors of estates of U.S. decedents) to report certain transactions with foreign trusts, ownership of foreign trusts (see IRC Sections 671-679), and receipt of certain large gifts or bequests from certain foreign individuals.

The SOI data for Forms 3520 with Gratuitous Transfers for 2010 shows U.S. taxpayers filed 950 returns with transfers for a total value of 1.49 billion dollars. This was an increase in the number of returns from 2006 (752 returns with transfers) and 2002 (429 returns with transfers). The total transferred value for the year of the study, however, decreased from 2002 (2.18 billion) and 2006 (1.64 billion).

Certain countries figure prominently in the SOI data. For Forms 3520 with Gratuitous Transfers for 2010, Mexico led the way with 178 transfers (approximately $236 million in value), followed by Puerto Rico (approximately $57 million in value). Other leading countries include St. Christopher/Nevis, with 58 ($21.68 million), Canada, with 49 ($63.69 million), Isle of Man with 47 ($82.44 million), and United Kingdom and Northern Ireland with 45 (12.78 million).

For Forms 3520 with Non-Grantor Trust Distributions, there were 1,698 total returns with total distributions of 3.165 billion dollars for the 2010 SOI data. This was also an increase from the 2006 data of 1,200 returns with distributions of 2.87 billion, and the 2002 data of 607 returns with distributions of 311 million dollars.

Form 3520-A

Form 3520-A (“Annual Information Return of Foreign Trust With a U.S. Owner”) must be filed by foreign trusts with a U.S. owner in order to satisfy its annual information reporting requirements under section 6048(b). Form 3520-A 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.

For the 2010 SOI data, 7,051 foreign grantor trusts reported total distributions of $3.96 billion, net income of 1.13 billion, and foreign taxes paid of 13.75 million. This is a huge increase from the 2006 data of 740 total returns with distributions of 57.88 million, net income of 6 million, and foreign taxes paid of $149 thousand; and 2002 with 2,550 returns with distributions of $884 million, net income of $358 million, and foreign taxes paid of $4 million. A distribution is defined by Form 3520-A instructions to be, “[A]ny gratuitous transfer of money or other property from a trust, whether or not the trust is treated as owned by another person under the grantor trust rules, and without regard to whether the recipient is designated as a beneficiary by the terms of the trust.”

Contact Sherayzen Law Office for Help With Forms 3520, 3520-A and Foreign Trust Tax Planning Issues

International tax issues, like foreign trust compliance, are highly complex and result in very costly mistakes and even criminal liability. This is why it is important to consult an experienced Form 3520 foreign trust tax attorney who would be able to analyze the issues involved, identify compliance requirements, complete all of the necessary legal and tax documents, and create a tax plan for moving forward.

Contact Sherayzen Law Office if you are a beneficiary of a foreign trust, an owner of a foreign trust, or you are thinking about a comprehensive asset protection plan involving foreign trusts. Our experienced international tax firm can assist you with U.S. tax compliance with respect to foreign trusts (including Forms 3520, 3520-A, FinCEN Form 114, (formerly form TD F 90-22.1), Form 8938 and other relevant forms) as well as creation of a comprehensive asset protection plan that will strive to balance tax optimization with asset protection strategies according to your needs.

2011 Offshore Voluntary Disclosure Initiative vs. Statute of Limitations

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As I already described in an earlier article, the IRS instituted a new voluntary disclosure program, called 2011 Offshore Voluntary Disclosure Initiative (“OVDI”). One of the most problematic areas under OVDI is the length of the examination period.

Agreeing to assessment of taxes and penalties for all voluntary disclosure years is part of the resolution offered by the IRS for resolving offshore voluntary disclosures. The OVDI disclosure period is 2003 through 2010 – eight years in total.

This contrasts greatly with the general three-year statute of limitations for IRS examination. Therefore, a tax attorney should consider all options prior to engaging in OVDI in order to avoid subjecting his client to unnecessary penalties.

One of the major factors in electing quiet disclosure versus OVDI is considering whether one or more of the numerous exceptions to the general IRS statute of limitations may apply. For example, if the IRS can prove a substantial omission of gross income, the statute of limitations is likely to be expanded to six years. Moreover, if there was a failure to file certain information returns, such as Form 3520 or Form 5471, the statute of limitations will not have begun to run. If the IRS can prove fraud, there is no statute of limitations for assessing tax. In addition, the statute of limitations for asserting FBAR penalties is six years from the date of the violation, which would be the date that an unfiled FBAR was due to have been filed. See 31 U.S.C. § 5321(b)(1).

Obviously, other factors should be considered before the decision to engage into OVDI is made. The chief factor would of course be the likelihood of criminal prosecution if the taxpayer fails to make use of OVDI. Engaging in voluntary disclosure pursuant to OVDI virtually eliminates possibility of criminal prosecution.

These factors aside, though, close analysis of the IRS statute of limitations is one of the most important considerations of whether to engage in OVDI.

Contact Sherayzen Law Office NOW!

Sherayzen Law Office can help. Our international tax firm has guided our clients throughout the United States through a voluntary disclosure process, making sure that the rights of our clients are protected and they pay only fair taxes and penalties.