U.S. Tax Compliance - Foreign Grantor Trusts - Foreign Gifts
If a Foreign Trust has a U.S. grantor, and one or more U.S. beneficiaries, under IRC §679 the Trust is classified as a foreign grantor trust and all Trust income, deductions and credits must be reported on the U.S. Grantor’s personal tax returns (Federal tax return/Form 1040).
The 2010 Hiring Incentives to Restore Employment Act (“2010 HIRE Act”) included the Foreign Account Tax Compliance Act which imposed new foreign grantor trust reporting obligations on Responsible Parties (i.e., U.S. Owners/ U.S. Settlor) of foreign grantor Trust (effective 3/18/10).
Since a U.S. grantor has neither the legal authority or the ability to force Foreign Trustees to file the Form 3520-A, the 2010 HIRE Act makes the grantor responsible to submit information to the IRS with respect to the Trust.
When a U.S. taxpayer forms a Foreign Grantor Trust, the following mandatory U.S. tax filings are required:
(1) Form SS-4 is to be filed immediately upon formation (this form is used to obtain the federal tax identification number for the Trust);
(2) Form 56 for reporting creation of fiduciary relationship (this form is filed upon the creation of the Trust, or is due with the first tax return filed for the Trust);
(3) Form 709
A transfer of Assets to a Foreign Trust may create a gift tax liability, dependent on whether or not there is a completed gift.
If the transfer is to an irrevocable, non-amendable trust there is a completed gift. In 2010, $1M in gifts are exempt from tax (Husband and Wife: $2M). The top gift tax rate of 35%, will be applicable to transfers over $500,000.
Although the estate tax is repealed in 2010, the gift tax remains in effect.
In 2010, there is an annual exclusion of $13,000 per donee for gifts ($26,000 for husband and wife, gift-splitting). There is an unlimited exclusion for payments of tuition and medical expenses.
Gifts to a non-citizen spouse are eligible for a gift tax annual exclusion of up to $134,000 (in 2010).
(4) Form 3520
This form is used to report transactions with foreign Trusts (and to report receipts of foreign gifts).
Form 3520 is sent to the IRS, P.O. Box 409101, Ogden, Utah 84409.
The U.S. Grantor of a Foreign Trust (as a responsible party) must notify the IRS of a reportable event: i.e., the creation of a foreign trust by a U.S. person, the transfer of money to a foreign trust by a U.S. person (including a transfer by reason of death), the death of a U.S. citizen or resident (if the decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules or if any portion of the trust estate was included in the gross estate of the decedent).
The notice of “reportable event” is due on or before the 90th day after the reportable event and is satisfied by the Responsible Party filing Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).
Responsible parties include: the grantor of an inter vivos trust, the transferor in a reportable event (other than by death), and the executor of a decedent’s estate.
U.S. beneficiaries of foreign trusts are subject to IRS reporting requirements, if they receive a distribution from the trust. IRS reporting includes: the name of the trust, the aggregate amount of the distributions received from the trust during the trust year (satisfied by filing Form 3520 with the IRS).
If a complete Form 3520 is not filed by the due date (including extensions), the time for assessment of any tax imposed, with respect to any event or period to which the information required to be reported, will not expire before the date that is three (3) years after the date on which the required information is reported.
Penalties (Form 3520 Filing)
If Form 3520 is not timely filed, or the information is incomplete or incorrect, the penalties imposed:
A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the penalty is:
• 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the transfer,
• 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution, or
• 5% of the amount of foreign gifts for each month the report is not filed (not to exceed 25%)
(5) Form 3520-A
Form 3520-A is the annual information return of a foreign trust with at least on U.S. owner, which includes:
1. Annual tax Information about the Foreign Trust
2. Annual Tax Information about its U.S. Beneficiaries
3. Annual Tax Information about any U.S. person who is treated as an owner of any portion of the foreign trust
Form 3520-A is filed with the Internal Revenue Service Center P.O Box 409101, Ogden, Utah 84405 and is due by the 15th day of the 3rd month after the end of the trust’s tax year.
Any U.S. person that is treated as the owner of any portion of a foreign trust (under the grantor trust rules) is responsible to ensure that the trust satisfies IRS reporting requirements, annually, which include: a complete accounting of trust activities and operations for the year, the name of the U.S. agent for the trust, and provides information to each U.S. person who is treated as the owner of any portion of the trust or who receives a direct or indirect distribution from the trust. IRS reporting is satisfied by the filing of Form 3520-A and providing copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement to the U.S. owners and beneficiaries.
Copies of the Foreign Grantor Trust Owner Statement and Foreign Grantor Trust Beneficiary Statement must be sent to the U.S. owners and U.S. beneficiaries by the 15th day of the 3rd month after the end of the Trust’s tax year.
The U.S. owner is subject to a penalty equal to 5% of the gross value of the Trust’s assets treated as owned by the U.S. person at the close of that year if the foreign trust:
1. Fails to timely file Form 3520-A
2. Does not furnish all of the information required by IRC §6048(b) or includes incorrect information (IRC §6677(b))
Penalties:
The U.S. owner of a foreign trust is subject to a penalty of 5% of the gross value of the portion of the foreign trust’s assets treated as owned by that person at the close of that year if the foreign trust fails to timely file Form 3520-A or does not furnish certain required information. Additional penalties may be imposed if the failure to file or furnish information continues after the IRS mails a notice to the U.S. owner.
No penalties will be imposed if the U.S. owner can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of the foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is to reasonable cause either.
Additional penalties may be imposed if noncompliance continues after the IRS mails a notice of failure to comply with required reporting.
Criminal penalties may be imposed under IRC §7203, 7206 and 7207 for failure to file on time and for filing a false or fraudulent return.
5. Appointment of U.S. Agent
Foreign Trust (U.S. Agent)
Under IRC §6048(b), any person who is treated as a grantor of all or any portion of a foreign trust must appoint a U.S. Agent for the Trust.
Failure to execute an authorization of Agent, binding upon the trust and the agent allows the IRS to make its own determination as to the amounts to be included by U.S. transferors under the grantor trust rules (IRC §6048(b)(2), Notice 97-34, Section IV (B)). The designation of a U.S. agent will not otherwise subject the agent to legal process and will not alone cause the foreign trust to have an office in the United States (IRC §6048(b)(2)).
If the Foreign Trust does not appoint a limited U.S. agent, for purposes of examination of books and witnesses, service of summons and enforcement of summons (IRC 7602 – 7604), the IRS may include in the grantor’s income anything it wants to include (IRC §6048(b)(2)(C)). The IRS can make whatever determination it wishes based on its own knowledge or information obtained through testimony or otherwise (IRC §6038A(e)(4) rules regarding judicial proceedings to quash a summons will apply).
6. Foreign Gifts
U.S. Persons that receive gifts from foreign individuals or entities must report such transfers on Form 3520 (Part IV Lines 62-64).
Generally, a U.S. Person must report on a Form 3520 (1) any gifts from a non-resident individual or foreign estate that collectively exceed $ 100,000, (2) any gifts from foreign corporations and foreign partnerships that collectively exceed $10,000 (adjusted for inflation). IRC §6039F.
In calculating the $100,000 threshold, the U.S. Person must aggregate gifts from different, foreign nonresident aliens and foreign estates if he or she knows (or has reason to know) that one of those person is acting as the nominee for the other person.
For tax years beginning in 2010, the reporting threshold amount for gifts from foreign corporations or partnerships is $14,165.
A gift to a U.S. donee does not include any amounts paid for qualified tuition or medical payments made on behalf of the U.S. donee.
The Form 3520 is due at the same time as the U.S. Person’s federal tax return, including extensions. But the Form is filed separately from that tax return (a copy should be attached to the Federal Tax Return).
If the U.S. Person, without reasonable cause, fails to disclose a foreign gift, the IRS has the right to determine the “proper” tax treatment of the gift, and the IRS’s determination (although reviewable) is subject to an arbitrary and capricious standard.
For each month that the failure continues, the U.S. Person is subject to a penalty of five percent of the gift for each month, up to a 25 percent maximum.
The IRS must issue a notice of deficiency and follow deficiency procedures in making any determination regarding the proper tax treatment of the gift, but it may summarily assess the five percent additional penalty.
7. Summary U.S. Tax Compliance Foreign Grantor Trusts (Foreign Gifts)
When a U.S. person receives a foreign gift, or establishes a foreign grantor trust, the following U.S. tax compliance is required:
1. Form 56 (upon trust formation)
2. Form SS-4 (for trust formation)
3. Form 3520 (on both trust formation within 90 days of the reportable event, or annually upon receipt of foreign gifts)
4. Form 3520-A (annually)
5. Form 709 (Gift Tax Returns) for transfer of Assets to fund a Foreign Trust
A copy of both Form 3520 and 3520-A is to be attached to the U.S. person’s tax return, with separate copies filed with the IRS in Ogden, Utah.
FATCA: Qualified Intermediary Reporting Requirements
Under the 2010 HIRE Act (IRC §1471(c)(1)), a foreign financial institution that is a party to a qualified intermediary agreement with the IRS must report the following information regarding each U.S. account maintained by the institution:
1. The name, address, and TIN of each account holder that is a specified U.S. Person.
2. The name, address and TIN of each substantial U.S. owner of any account holder that is a U.S. owned foreign entity.
3. The account number.
4. The account balance or value as determined at such time and in such manner as the IRS prescribes.
5. The gross receipts and gross withdrawals or payments from the account as determined for such period and in such manner as the IRS prescribes.
A Qualified Intermediary (“QI”) is a foreign financial institution that has entered into a withholding and reporting agreement (QI Agreement) with the IRS (T.R. §1.1441-1(e)(5)(ii)).
For U.S. Taxpayers, the QI must provide the U.S. payor with Form W-9 for each U.S. recipient account holder (the QI is not required to back-up withhold or file Form 1099).
For non-resident withholdings, a QI is a withholding agent subject to reporting rules, and payor for purposes of back-up withholding and Form 1099 information reporting rules.
Under a QI Agreement, a QI may choose not to assume primary responsibility for non-resident withholding. The QI must provide a U.S. withholding agent with Form W-8IMY certifying the status of its unnamed U.S. account holders and is not required to withhold or report the payments on Form 1042-S.
A foreign financial institution that becomes a QI and elects primary withholding responsibility is not required to forward beneficial ownership information regarding its customers to a U.S. financial institution or other withholding agent of U.S. source investment income to establish the customer’s eligibility for an exemption from or reduced rate of, U.S. withholding tax.
Instead, the QI is permitted to establish for itself the eligibility of its customers for an exemption or reduced rate, based on a Form W-8, and information as to residence obtained under the know-your-customer rules to which the QI is subject in its home jurisdiction, as approved by the IRS or as specified in the QI Agreement (Rev. Proc. 2000-12, 2000-1 CB 387).
A QI may treat an account holder as a foreign beneficial owner of an account if the account holder provides a valid Form W-8 or other valid documentary evidence supporting foreign status. The QI cannot reduce the withholding rate if the QI knows the account holder is not the beneficial owner of a payment to the account.
If the foreign account holder is the beneficial owner of a payment, the QI can shield the account holder’s identity from U.S. custodians and the IRS.
If a foreign account holder is a nominee and not the beneficial owner of a payment, the account holder must provide the QI with Form W-IMY for interest and specific information about each beneficial owner to which the payment related.
A QI that receives this information may shield the account holder’s identity from a U.S. custodian, but not from the IRS.
If an account holder is a U.S. Person, the account holder must provide the QI with Form W-9 supporting U.S. status. Absent receipt of Form W-9, the QI must follow the presumption rules in the QI agreement to determine whether non-resident 30% withholding, or 28% back-up withholding, is required. A reduced rate of non-resident withholding may not be applied based on the presumption rules.
Pursuant to the QI agreement presumption rules, U.S. source investment income paid to an off-shore account is presumed paid to an undocumented foreign account holder and is subject to 30% withholding.
Foreign source income and broker proceeds paid to an off-shore account are presumed paid to a U.S. exempt recipient and are exempt form both non-resident and back-up withholding.
A QI must file Form 1042 by March 15th of the year following any calendar year in which the QI acts as a QI.
A QI is not required to file Form 1042-S for amount paid to each separate account holder, but must file a separate Form 1042-S for each type of reporting paid (income that falls within a particular withholding rate or within a particular income, exemption or recipient code).
United States of America v. UBS AG (Declaration of Daniel Reeves)
Filed under: IRS, UBS, int tax compliance, offshore trusts, tax evasion, tax haven, unreported income
The following 305 page IRS affidavit is the Declaration of Daniel Reeves, a duly commissioned Internal Revenue Agent and Offshore Compliance Technical Advisor employed in the Small Business/Self Employed Division of the Internal Revenue Service. He is assigned to the Internal Revenue Service’s Offshore Compliance Initiative. The Offshore Compliance Initiative develops projects, methodologies, and techniques for identifying US taxpayers who are involved in abusive offshore transactions and financial arrangements for tax avoidance purposes.
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