United States: Foreign Trust Reporting And Compliance, Part Two

Last Updated: January 12 2009
This article is part of a series: Click Foreign Trust Reporting And Compliance, Part One for the previous article.
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V. Filing Mechanics: Form 3520 and 3520-A

A. Form 3520

Form 3520 has several uses, which may cause confusion. Generally, Part 1 covers transfers to a foreign trust by a U.S. person, including a U.S. citizen or resident alien, a U.S. domestic partnership, corporation, trust or estate. Part II provides information on the owner of a foreign trust settled by a U.S. person. However, Part III is only used for beneficiaries of nongrantor trusts and should not be completed by U.S. foreign trust settlors. Part IV is not at all related to trust distributions and is only used for U.S. persons that receive large gifts from foreign donors. Note that a trust distribution will not constitute a foreign gift and should be reported on Part III rather than Part IV.

Form 3520 is filed separately from the personal income tax return of the U.S. settlor, transferor or recipient and is due on the date of such personal income tax return, including extensions. The 2006 Instructions for Form 3520 indicate that the Form 3520 should be sent to: Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. It is a good practice to attach a copy of the personal tax return extension to the Form 3520 to avoid notices concerning late filing penalties.

1. Potential Penalties

There are significant penalties for not filing the form in a timely manner. For failure to file or incomplete filing of Form 3520, section 6048 imposes a penalty of 35% of the gross value of property transferred to the foreign trust or 35% of the value of distributions received from a foreign trust. This penalty is imposed on the trust settlor or beneficiary. Recipients of large foreign gifts are subject to penalties of 5% of the amount of the gift per month for each month that the failure to file continues, up to a maximum of 25%.

Further, if the IRS mails a notice of a failure to file, and the person does not comply within a 90 day period, section 6677 imposes an additional penalty of $10,000 for each 30-day period. The penalties cannot, however, exceed the gross reportable amount. The penalties may not be imposed if the failure to file is shown to be due to reasonable cause.

To avoid penalties under section 6677, it is advisable to a file Form 3520 by attaching it to a settlor's or transferor's timely filed income tax return (with regard for any applicable extensions).74 In the case of a testamentary transfer of property, as well as the death of a U.S. citizen or resident who was considered to own any portion of a foreign trust or in whose estate are included a foreign trust's assets, Notice 97-34 appears to put the burden on the decedent's executor to file Form 3520 with the decedent's final income tax return.

2. Schedules to Form 3520

U.S. owners of foreign trusts should complete Parts I and II and it is usually advisable for them to appoint a U.S. agent in the first filing year and to obtain a Foreign Grantor Trust Owner Statement ('FGTOS') which the Trustee has engaged a U.S. tax preparer to complete from the Trust financials to attach to the Form 3520.

U.S. beneficiaries of foreign trusts should complete Part III and it is usually advisable for them to obtain a Foreign Nongrantor Trust Beneficary Statement ('FNGTBS') or a Foreign Grantor Trust Beneficiary Statement ('FGTBS')which the Trustee has engaged a U.S. tax preparer to complete from the Trust financials to attach to the Form 3520.

Recipients of large foreign gifts should complete Part IV for gifts received with values of more than $100,000 from a nonresident alien individual or estate or more than $12,760 from foreign corporations or foreign partnerships.

B. Form 3520-A

Form 3520-A is generally filed by the trustee or fiduciary of the foreign grantor trust, unless the trust is a Canadian registered retirement savings plan, a Canadian registered retirement income fund, or another Canadian eligible plan.75

To avoid penalties, a complete Form 3520-A must be filed with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, by the 15th day of the 3rd month after the end of the trust's tax year.76 The trust must also provide copies of the FGTOS and FGTBS 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 or the Form 3520-A filing due date including extensions.

1. Potential Penalties

Penalties for failure to file or incomplete filing for Form 3520-A can be significant. In particular, the U.S. owner of the foreign trust is subject to a penalty equal to 5% of the gross value of the portion of the foreign trust assets he is treated as owning under U.S. law.77 Therefore, it is in the interest of the grantor to alert the foreign trustee to the importance of timely and accurate filing of Form 3520-A.

In addition, if the IRS notifies the grantor of a failure to file, and Form 3520-A is not filed within 90 days of the date of mailing of the IRS notice, an additional penalty of $10,000 per 30 days (or fraction thereof) is assessed until the Form 3520-A is filed.78 The total monetary penalty for a trustee's failure to furnish the annual trust return or to provide the specified trust accounting information to any U.S. grantor or beneficiary cannot exceed the gross value of the trust assets considered owned by the U.S. grantor.79 The monetary penalty is in addition to any applicable criminal penalty.80 As with most failure to file timely penalties, the IRS can abate the section 6677(b) penalty if the person responsible for filing Form 3520-A can demonstrate that the failure to file timely was due to reasonable cause, and not willful neglect.81

2. Schedules and Attachments to Form 3520-A

The trustee must attach to the Form 3520-A the "Foreign Trust Income Statement," the FGTOS and the FGTBS. Further, as noted above, the trustee must provide a copy of the FGTOS to each U.S. person considered to own a portion of the trust and a copy of the FGTBS to each U.S. beneficiary who received a trust distribution during the taxable year.82

Note that the "Foreign Trust Income Statement" requires a substantial amount of information to be disclosed to the IRS, including: (i) certain background information (which, for practical purposes, requires that the foreign trust obtain a U.S. employer identification number, since a 5% penalty can be imposed for failure to furnish complete information to the IRS); (ii) a trust balance sheet indicating both beginning and year-end balances and that establishes the trust's assets, liabilities, and retained earnings; (iii) an annual income statement determined under U.S. tax accounting principles; (iv) the "owner statement," which includes a statement of net trust income attributable to the owner (with separate statements attached for each U.S. owner); and (v) the "beneficiary statement" (with separate statements attached for each U.S. beneficiary receiving a trust distribution during the taxable year).83

It may also be beneficial for the trustee to retain a U.S. tax preparer to ensure that the "Foreign Trust Income Statement," the "Foreign Grantor Trust Owner Statement" and the "Foreign Grantor Trust Beneficiary Statement" correctly report, using U.S. generally accepted accounting principles, the income arising in and distributions from the trust. Further, it is advisable for the foreign Trustee to retain a U.S. tax preparer to analyze the trust financials and prepare the "Foreign Grantor Trust Owner Statement" for income arising in the trust taxable to the grantor or "Foreign Grantor Trust Beneficiary Statement" for income arising in the trust distributed to someone other than the settlor.

VI. Returns Relating to Foreign Bank Accounts

A. In General

Each U.S. person having a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year must report such relationship by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"), in addition to noting that they have such foreign account filing requirement on Schedule B of Form 1040 and including the income from these accounts on the United States person's U.S. federal income tax return.84

The Form TD F 90-22.1 was recently revised in October 2008. The revised form provides additional definitions and clarifications. It also generally expands the class of individuals and companies required to make annual reports, including certain foreign persons in and doing business in the United States (including a branch of a foreign entity) and certain trusts with U.S. settlors. There are also more detailed rules regarding consolidated reports for corporate parents and subsidiary corporations. The revised form confirms that there is no extension of time for filing the form.

B. Who Must File

Form TD F 90.22-1 is required to be filed by every U.S. person for each calendar year in which such person has a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year.85 Note that the test is based in the alternative – financial interest in or signature authority over the account. Thus, there may be multiple potential filers for a single account, with certain exceptions, noted below, for officers and employees of widely-held or publicly-traded companies.

1. Definitions

For purposes of FBAR, the term "United States person" means a citizen or a resident of the United States, or a person in and doing business in the United States.86 A foreign subsidiary of a U.S. person is not required to file this report, although its U.S. parent corporation may be required to do so.87 A branch of a foreign entity that is doing business in the United States is required to file this report even if not separately incorporated under U.S. law.88

The term "financial account" generally includes any bank, securities, securities derivatives or other financial instrument accounts, including any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund.89 The term also means any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution or other person engaged in the business of a financial institution.90 Individual bonds, notes, or stock certificates held by the filer are a financial account, nor is an unsecured loan to a foreign trade or business that is not a financial institution.91

Any of the financial accounts described above is considered to be a foreign financial account for purposes of FBAR, if it is located outside the United States, Guam, Puerto Rico, and the Virgin Islands.92 However, an account maintained with a military banking facility93 is not considered to be a foreign financial account for purposes of FBAR, even if the military banking facility is located in a foreign country.94 The geographical location of the account, not the nationality of the financial entity institution in which the account is founds determines whether it is in an account in a foreign country.95 That is, the situs of a financial account is determined by the location where the branch is, not the location of the institution's home office. Thus, for example, an account maintained at a German branch of a U.S. bank is a foreign financial account, but an account maintained at a U.S. branch of a German bank is not a foreign financial account.

2. Ownership of Accounts

The instructions to Form TD F 90-22.1 explain that a U.S. person has a financial interest in a bank, securities, or other financial account in a foreign country under either of the following circumstances:

  1. A U.S. person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-U.S. persons. If an account is maintained in the name of two persons jointly, or if several persons own a partial interest in an account, each of those U.S. persons has a financial interest in that account.96
  2. A U.S. person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is:
    1. A person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person;
    2. A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the total value of shares of stock or more than 50 percent of the voting power of all shares of stock;
    3. A partnership in which the U.S. person owns an interest in more than 50 percent of the profits (distributive share of income) or more than 50 percent of the capital of the partnership; or
    4. A trust in which the U.S. person either has a direct or indirect present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.97
  3. 3. A U.S. person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is a trust, or a person acting on behalf of a trust, that was established by such U.S. person and for which a trust protector has been appointed.98

3. Signature Authority

For purposes of Form TD F 90.22-1, a U.S. person is considered to have signature authority over a foreign financial account if such person can control the disposition of money or other property in the account by delivering his or her signature (or his or her signature and that of one or more other persons) to the bank or other person maintaining the account. In addition, a U.S. person has "other authority" subject to FBAR reporting if such person can exercise comparable power over an account by direct communication to the bank or other person maintaining the account, either orally or by some other means.

4. Exceptions

Notwithstanding the general rules, Form TD F 90.22-1 is not required to be filed under the following circumstances:

  1. An officer or employee of a bank which is currently examined by Federal bank supervisory agencies for soundness and safety need not report that he or she has signature or other authority over a foreign bank, securities or other financial account maintained by the bank, if the officer or employee has NO personal financial interest in the account.99
  2. An officer or employee of a domestic corporation whose equity securities are listed upon U.S. national securities exchanges or which has assets exceeding $10 million and 500 or more shareholders of record need not file such a report concerning the other signature authority over a foreign financial account of the corporation, if he has NO personal financial interest in the account and he has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current report, which includes that account.100 There are additional exceptions for domestic and foreign subsidiaries.
  3. As noted above, a U.S. person is not required to report any account maintained with a branch, agency, of other office of a foreign bank or other institution that is located in the United States, Guam, Puerto Rico, and the Virgin Islands.101

C. Mechanic of Filing

Reporting on Form TD F 90-22.1 is required for each calendar year that a U.S. person maintains such interest or authority over foreign financial accounts.102

The Form TD F 90-22.1 must be filed on or before June 30 each calendar year. An extension for filing one's U.S. income tax return does not extend the deadline for making a TD F 90-22.1. That is, there is no extension of time available for the late filing.103

D. Practical Considerations

Each U.S. person subject to this reporting requirement must also maintain records showing, (1) the name in which each such account is maintained, (2) the number or other designation of such account, (3) the name and address of the foreign bank or other person with whom such account is maintained, and (4) the type of such account, and the maximum value of each such account during the reporting period.104 These records must be retained for a period of 5 years and must be kept at all times available for inspection as authorized by law.105

VII. Potential IRS Penalties

The failure to file the required tax returns and certain information returns may result in civil and criminal penalties, as discussed below. Potential penalties on the failure to file the FBAR are also discussed below.

A. Income Tax Returns

  1. Section 6651, Failure to File Tax Returns or to Pay Tax In addition to the tax due, if a taxpayer fails to file a return, there may be imposed a penalty of 5% per month of the amount of tax required to be shown on a tax return. The amount of the penalty is not to exceed 25% of the amount of tax in the aggregate. There is an exception if the failure was due to reasonable cause, not willful neglect.
  2. Section 6662, Substantial Underpayment of Tax

In addition to the tax due and the penalty imposed under section 6651, a taxpayer could be subject to a penalty of 20% of the amount of the underpayment.  This penalty is imposed on both (a) negligence or disregard of rules or regulations, and (b) any substantial underpayment of tax (understatement of greater than 10% or $5,000).

  1. EXCEPTION 1:  There is a reasonable cause exception whereby the substantial underpayment of tax penalty may be alleviated if there was a reasonable cause for the underpayment (i.e., there is "substantial authority" for or adequate disclosure of the position and the position is not a tax shelter) and the taxpayer acted in good faith with respect to the underpayment.
  2. EXCEPTION 2:  If the taxpayer is subject to the (worse) fraud penalty under section 6663, then the substantial underpayment penalty does not apply.  Generally, pursuant to section 6663, if the underpayment is based on fraud, in addition to the tax due, taxpayer could be subject to a penalty of 75% of the portion of the underpayment attributable to fraud.  However, the Code provides an exception for reasonable cause.

B. Certain Information Returns (Forms 3520, 3520-A and 5471)

  1. Forms 3520 and 3520-A

Section 6677, Failure to File Information with Respect to Certain Foreign Trusts

Form 926
  1. If a U.S. transferor fails timely file a Form 3520 to report the transfer of property to a foreign trust, or files the form incorrectly or incompletely, the IRS may impose a penalty equal to 35% of the gross value of the property transferred to the foreign trust.106
  2. Similarly, if a U.S. beneficiary fails to timely file a Form 3520 to report the receipt of a distribution from a foreign trust, or files the form incorrectly or incompletely, there may imposed a penalty equal to 35% of the gross value of the distribution received from the foreign trust.107
  3. Finally, if a U.S. donee fails to timely file a Form 3520 to report the receipt of a large foreign gifts, or files the form incorrectly or incompletely, such donee may be subject to a penalty equal to 5%, not to exceed 25%, of the value of the gift or bequest received in the relevant year.
  4. If a foreign grantor trust that fails to timely file a Form 3520-A, or fails to furnish all of the required information, the U.S. owner may be subject to a penalty equal to 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person at the close of the taxable year.108
  5. The failure to timely file a complete and correct Form 3520 or Form 3520-A may result in an additional penalty of $10,000 per 30-day period for failing to comply within 90 days of notification by the IRS that the information return has not been filed.109 The total penalty for failure to report a trust transfer, however, cannot exceed the amount of the property transferred.110 The monetary penalty is in addition to any applicable criminal penalty.111 If the person responsible for reporting can demonstrate that the failure to timely file was due to reasonable cause, and not willful neglect, the IRS can abate the penalty under section 6677(a) or 6677(b).112
  1. Form 5471: Category 2 and Category 3 Filers Section 6038(b), Information Reporting with Respect to Certain Foreign Corporations and Partnerships The IRS may impose a penalty of $10,000 for each failure to timely file a Form 5471, or filing a Form 5471 which does not show the information required under section 6038. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) can be imposed for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to $50,000. There is no reasonable cause exception for either the initial or additional penalty.
  2. Form 5471: Category 4 and Category 5 Filers Section 6679, Failure to File Returns, Etc. with Respect to Foreign Corporations or Foreign Partnerships The IRS may impose a penalty of $10,000 for each failure to timely file a Form 5471, or filing a Form 5471 which does not show the information required under section 6046. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) can be imposed for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to $50,000. There is a reasonable cause exception for the initial $10,000 penalty; however, there is no such exception for the additional penalty.
  3. Form 926 Section 6038B(c), Notice of Certain Transfers to Foreign Persons If a U.S. person fails to timely provide information regarding certain transfers to foreign corporations as required under section 6038B, the IRS may impose a penalty equal to 10% of the fair market value of the property transferred at the time of the exchange. There is a reasonable cause exception. Additionally, the amount of the penalty imposed under this section is limited to $100,000, unless the failure was due to intentional disregard.
  4. Information Returns Generally
    1. Section 6721, Failure to File Correct Information Return There may be imposed an additional penalty of $50 for each return (not to exceed $250,000 per year) which fails to include all of the required information or includes incorrect information.  There is an exception to this penalty if the failure is corrected within 30 days after the required filing date.  However, if the failure is based on intentional disregard, then no exception applies (including the $250,000 cap) and the amount of the penalty is the greater of $100 or 10% of the aggregate amount of the items required to be reported.  There is no reasonable cause exception.
    2. Section 6723, Failure to Comply with Other Information Reporting Requirements

There may be imposed an additional penalty of $50 for each failure to comply with a required information reporting (not to exceed $100,000 per year).  There is no exception, including a reasonable cause exception.

C. Form TD F 90.22-1

The willful failure to file the FBAR is a felony113 and can result in the imposition of substantial civil and/or criminal penalties.114

  1. FBARs Due On Before June 30, 2004

For FBARs due before June 30, 2004, there was no civil penalty for the non-willful failure to file an FBAR. A willful failure to file the FBAR could lead to a civil penalty of not more than $25,000115, in addition to the following criminal penalties:

  1. If a U.S. person willfully violates the reporting requirement, such person may be subject to a fine of not more than $250,000, or imprisoned for not more than 5 years, or both;116 and
  2. If a U.S. person willfully violates the reporting requirement while violating another law of the United States, or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, such U.S. person may be subject to a monetary fine of not more than $500,000, or imprisoned for not more than 10 years, or both.117

In addition, if a U.S. person, with respect to Form TD F 90.22-1, (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact, (2) makes any materially false, fictitious, or fraudulent statement or representation, or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry, such person may be fined, or imprisoned for not more than 5 years, or both.118

2. FBARs Due On or After June 30, 2005

The "American Jobs Creation Act of 2004"119 ("Jobs Act") significantly altered the potential civil penalties applicable to violations of the FBAR reporting requirement. The revised penalties are applicable to violations occurring after October 22, 2004, i.e., FBARs due on or after June 30, 2005.

  1. A non-willful violation of the FBAR reporting requirement can result in a civil penalty not exceeding $10,000.120 The penalty may be waived if (1) the violation was due to reasonable cause, and (2) the amount of the transaction or the balance in the account at the time of the transaction was property reported.121
  2. A willful failure to file the FBAR can result in a civil penalty of the greater of $100,000 or 50% of the value of the foreign account at the time of the violation.122 The reasonable cause exception does not apply to willful violations.

D. Criminal Penalties

In addition to the above, criminal penalties under sections 7203 (monetary and penal penalties for willful failure to file supply information), 7206 (monetary and penal penalties for fraud and false statements) and 7207 (monetary and penal penalties for fraudulent statements) may apply.

Footnotes

1 Unless otherwise noted, all section references herein are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

2 I.R.C. § 6012(a); Treas. Reg. § 1.6012-1(b)(1); see also Instructions to Form 1040NR.

3 I.R.C. § 6012(a)(1)(A) The only true exception to when a U.S. citizen or resident individual has to file a Form 1040 (or Form 1040A or 1040EZ) is where the individual does not meet certain income thresholds. Sections 6012(a)(1)(C) and (D) create certain exceptions to the exception in section 6012(a)(1)(A).

4 I.R.C. § 6048(a). In Notice 97-34, 1997-25 I.R.B. 22, the IRS clarified section 6048(a)'s notice requirements. The Form 3520, used to report transfers to foreign trusts, is filed with a U.S. transferor's annual income tax return.

5 I.R.C. § 6048(a)(3).

6 I.R.C. § 6048(a)(4).

7 Treas. Reg. §  301.7701-4(a).

8 Id.

9 Treas. Reg. § 301.7701-4(b).

10 Treas. Reg. § 301.7701-4(c). An investment trust is classified as a business trust if either (i) there is a power under the trust agreement to vary the investment of the certificate holders or (ii) with certain limited exceptions, the trust has multiple classes of ownership interests. Id.

11 I.R.C. § 7701(a)(30)(E).

12 I.R.C. § 7701(a)(31).

13 Treas. Reg. § 301.7701-7(c)(1)(i).

14 Treas. Reg. § 301.7701-7(c)(1)

15 Treas. Reg. § 301.7701-7(c)(4)(ii).

16 Treas. Reg. § 301.7701-7(c)(3)(ii).

17 Treas. Reg. § 301.7701-7(c)(3)(iii).

18 Treas. Reg. § 301.7701-7(c)(3)(iv).

19 Treas. Reg. § 301.7701-7(c)(4)(i)(D).

20 Treas. Reg. § 301.7701-7(c)(4)(i)(A).

21 Treas. Reg. § 301.7701-7(c)(4)(i)(C).

22 Treas. Reg. § 301.7701-7(d)(ii).

23 Treas. Reg. § 301.7701-7(d)(iii).

24 Treas. Reg. § 1.651(a)-1.

25 I.R.C. §§ 651 and 661.

26 I.R.C. §§ 651 and 661.

27 See discussion of foreign trust DNI at III-A below

28 I.R.C. § 661(a)(2)

29 I.R.C. § 671.

30 Treas. Reg. § 1.671-2(e)(1).

31 Treas. Reg. § 1.671-2(e)(2).

32 I.R.C. § 671 and Treas. Reg. § 1.671-2(c).

33 I.R.C. § 672(f)(2).

34 I.R.C. § 672(f)(5).

35 Pub. L. No. 104-188, section 1904(d)(2) & (e); Treas. Reg. § 1.672(f)-3(a)(3), (b)(3), (d).

36 I.R.C. § 679; see also Zaritsky, Howard M., U.S. Taxation of Foreign Estates, Trusts and Beneficiaries, BNA 911-2nd, A-23.

  1. I.R.C. § 679(a)(2)(A).

38 I.R.C. § 679(a)(2)(B).

39 I.R.C. §§ 679(a)(1) and 6048(a)(3)(B)(ii).

40 I.R.C. § 679(a)(4).

41 See Zaritsky, supra note 44 at A-24.

42 I.R.C. § 641(b).

43 I.R.C. § 1(e).

44 I.R.C. § 643(a).

45 I.R.C. § 643(a)(6).

46 I.R.C. § 643(a)(3); Treas. Reg. § 1.643(a)-3.

47 To the extent that all DNI is not distributed to a beneficiary in any U.S. tax year, the undistributed amount is added to the trust's UNI. This has serious implications on future distributions in a number of ways. First, to the extent that the trust has income that would be subject to favorable U.S. tax rates (i.e., the 15% long term capital gain rate on assets held greater than one year and the 15% rate on "qualified dividends"), the benefit of the favorable rates is lost. All UNI is treated as ordinary income when it is distributed to a U.S. beneficiary.

48 I.R.C. § 666 and 667.

49 I.R.C. § 666(a).

50 I.R.C. § 667(b)(1)(A).

51 I.R.C. § 667(b)(1)(B).

52 I.R.C. § 667(b)(1)(C).

53 I.R.C. § 667(d)((1)(C)(ii)

54 Treas. Reg. § 1.6012-1.

55 See Instructions to Form 1040NR.

56 See Instructions to Forms W-8BEN, W-8IMY, and W-9.

57 I.R.C. § 6048(b).

58 I.R.C. § 6048(b)(1)(A).

59 I.R.C. § 6048(b)(1)(B).

60 I.R.C. § 6048(a).

61 Form 3520 is filed separately from Form 1040, but the Form is due on the date the individual's U.S. income tax return (Form 1040) is due (including extensions). Form 3520 must be filed timely to avoid penalties for failing to timely report. See Instructions for Form 3520.

62 These reporting rules apply generally to "reportable events" occurring after August 20, 1996, the date of enactment of the 1996 Small Business & Jobs Protection Act, Pub. L. No. 104-188. The 1996 Act created five types of reportable events: (1) the creation of a foreign trust by a U.S. person; (2) the transfer of any money or property by a U.S. person to a foreign trust (including by way of a testamentary transfer); (3) the death of a U.S. person who was the owner of any portion of a foreign trust under the grantor trust rules or in whose estate are included a foreign trust's assets; (4) the U.S. residency starting date of the grantor of a foreign trust subject to tax under section 679(a)(3) (relating to certain pre-immigration trusts); and (5) outbound trust migrations. Note that section 684 imposes a capital gains tax on transfers of appreciated property to foreign nongrantor trusts. A trust that migrates from domestic to foreign nongrantor trust status is subject to the tax imposed under section 684(a).

63 Treas. Reg. § 1.671-2(e)(2)(i).

64 Treas. Reg. § 1.671-2(e)(2)(ii).

65 Treas. Reg. § 1.671-2(e)(2)(i).

66 See Instructions for Form 3520.

67 Treas. Reg. § 1.684-3(d).

68 Notice 97-34, section III.

69 Id.

70 Section 679 provides for exceptions to the exception for transfers at fair market value to a foreign trust that is a related party (for transfers occurring after February 5, 1995.

71 Notice 97-34, section III C 2.

72 I.R.C. 6048(a)(3)(B)(ii); Notice 97-34.

73 I.R.C. 6048(c)

74 Treas. Reg. § 1.6081-1; see also Notice 97-34, section VIII A; Instructions for Form 3520.

75 See Instructions for Form 3520-A; see also Rev. Proc. 2002-23, 2002-15 I.R.B. 744, section 3, for other eligible Canadian plans.

76 See Instructions for Form 3520-A.

77 I.R.C. § 6677(b)(2).

78 I.R.C. § 6677(a).

79 Id.

80 I.R.C. § 7203.

81 I.R.C. § 6677(d).

82 Notice 97-34.

83 Notice 97-34; see also Instructions for Form 3520-A.

84 See Instructions for Form TD F 90-22.1 (revised October 2008).

85 See id.

86 See id.

87 See id.

88 See id.

89 See id.

90 See id.

91 See id.

92 See id.

93 Such facilities are generally known as a "United States military banking facility" or a "United States military finance facility" that are operated by a U.S. financial institution designated by the U.S. government to serve U.S. government installations abroad.

94 See id.

95 See id.

96 See id.

97 See id.

98 See id.

99 See id.

100 See id.

101 See id.

102 31 CFR § 103.24. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate. Id.

103 See id.

104 31 CFR § 103.32.

105 Id.

106 See also Instructions for Form 3520.

107 See id.

108 See id.

109 I.R.C. § 6677(a).

110 Id.

111 I.R.C. § 7203.

112 I.R.C. § 6677(d).

113 31 U.S.C. § 5322(a).

114 The IRS has acknowledged, at least informally, that its voluntary disclosure policy applies to FBAR related offenses. Thus, a taxpayer may be able to utilize the voluntary disclosure process to avoid criminal sanctions for the non-filing of the FBAR.

115 31 U.S.C. § 5321. Section 5321 generally provides that if a U.S. person willfully violates a provision of the BSA or a regulation issued under the BSA, such person may be liable for a civil penalty of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25,000. With respect to reporting on Form TD F 90.22-1, a U.S. person is not reporting a transaction but, rather, reporting his interest or signature authority over a foreign financial account. Thus, the maximum amount of potential civil penalty is $25,000.

116 31 U.S.C. § 5322(a).

117 31 U.S.C. § 5322(b).

118 18 U.S.C. § 1001.

119 P.L. 108-357.

120 31 U.S.C. § 5321(a)(5), as amended by P.L. 108-357.

121 Id.

122 Id.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

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