Tax Issues

Foreign Trust Reporting

If you are an owner, trustee, or beneficiary of a foreign trust, you must report all activity to the IRS every year. Foreign trust reporting is international in nature and can be quite complex. However, the 2020 IRS release of Revenue Procedure 2020-17 provides an easy solution for compliance. 

This article will summarize what foreign trust reporting entails so you can avoid penalty. 

What is a Foreign Trust?

A foreign trust is an account that holds money or assets overseas. A revocable trust is a common example. 

A revocable trust is used for personal residences. The Grantor or Settlor creates the trust and transfers the home into the trust. The trust is administered by the trustee. The trust property is claimed by the beneficiary. 

Who Needs to Report a Foreign Trust?

You will need to follow requirements for reporting foreign trusts if:

  • You created a foreign trust
  • You transferred money or property to a foreign trust
  • You received a distribution from a foreign trust
  • You are recognized as the American owner of a foreign trust

How Do I Report Overseas Holdings to the IRS?

The procedure for foreign trust reporting will vary depending on the type of trust it is and how much income it is generating. Generally, it is not needed for accounts such as a minor’s trust account in the U.K. or a foreign retirement account. 

Foreign trusts are usually reported using Form 3520-A. Each person recognized as the owner of the trust under grantor trust rules must file. 

If the foreign trust fails to file a Form 3520-A, the U.S. owner must complete their own Form 3520-A which is to be attached to their Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. 

Forms must be filed and sent to the IRS by the 15th day of the 3rd month after the end of the trust’s tax year. Copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement must be given to the U.S. owners and beneficiaries by the same due date. 

Penalties For Failing to Report Foreign Trusts

Those who fail to meet requirements for reporting foreign trusts may be facing the following penalties:

  • The U.S. owner may be facing a penalty of $10,000 or 5% of the gross value of their trust assets if the required paperwork is not filed by the due date. 
  • The U.S. owner may be facing an additional penalty of $10,00 0or 5% of the gross value of their trust assets if forms are not filed by the end of the tax year. 
  • Additional penalties may be added if noncompliance continues 90 days after the IRS mails out a notice alerting the owner of the failure to file. 
  • Criminal penalties may apply for failure to file on time and/or for filing false information. 

Do I Need an Attorney to Assist with My Foreign Trust Reporting?

Generally, you will want to consult an attorney before setting up any type of foreign trust. The attorney you choose will continue assisting you with foreign tax reporting and they will help you if any issues arise. 

If you require aid in setting up a foreign trust or foreign trust reporting, Frost Law is the attorney to call. We have years of experience with tax controversy cases. We will see to it that your taxes are filed correctly so you always stay on the right side of the law. Call us at 410-497-5947 or fill out our quick contact form for your free initial consultation to get the reliable representation you need.

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