IRS Logo
Print - Click this link to Print this page

Foreign Trust Reporting Requirements

 

International Tax Gap Series

August 2008

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.

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 trust, 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:

  • Creates or transfers money or property to a foreign trust
  • Receives (directly or indirectly) any distributions from a foreign trust
  • Receives certain gifts or bequests from foreign entities

Form 3520 Instructions have 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. personwho 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.

Instructions to Form 3520-A 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

  • U.S. owner of a foreign trust - In general, the U.S. owner of a foreign trust is taxed on the income of that trust.
    A U.S. person is treated as the owner of a foreign trust under the grantor trust rules of Internal Revenue Code sections 671-679, which includes someone who transfers assets to a foreign trust which has a U.S. beneficiary of any portion of the trust. *Each U.S. owner should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3), which includes information about the foreign trust income they must report.
  • U.S. beneficiary of a foreign trust – In general, the U.S. beneficiary of a foreign trust will report their share of foreign trust income to the extent it is not reported by the transferors to the trust under the grantor trust rules. The U.S. beneficiary should receive a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, or a Foreign Non Grantor Trust Beneficiary Statement which includes information about the taxability of distributions they have received and foreign trust income they must report.
  • U.S. transferor of assets to a non grantor foreign trust - Internal Revenue Code section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust. See the Instructions for Form 3520-A for additional information.

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

Additional Information about any of the foreign trust reporting requirements and related income tax consequences is available by clicking on the relevant links throughout the article.

 

Return to:  
The International Tax Gap Series

Page Last Reviewed or Updated: 03-Feb-2014