Reminder Regarding U.S. Reporting of Foreign Trusts

Tax filing season is among us once again!  If a taxpayer were to miss a filing deadline, whether inadvertently or not, there is the possibility of incurring penalties and/or interest.

Some of these penalties can become quite material, such as the penalties relating to the Form 3520 and Form 3520-A filing requirements for U.S. persons that have transactions with foreign (non-U.S.) trusts.

Foreign trusts can include trusts in the traditional sense, such as family trusts and estates; however, Canadian Tax-Free Savings Accounts (TFSAs), Canadian Registered Education Savings Plans (RESPs), and Canadian Registered Disability Savings Plans (RDSPs) also fall under the category of foreign trusts for U.S. reporting purposes.

These types of accounts are not “tax-free” or “tax-deferred” from the U.S. tax filing perspective.  The U.S. owner(s) and/or U.S. beneficiary(ies) have to report the income earned in these accounts over the year (including any government grants received), along with filing the Form 3520 and Form 3520-A informational reports for each trust or each account.

Who is a U.S. Person?

For the purposes of Form 3520 and Form 3520-A filing, a U.S. person is:

  • A U.S. citizen;
  • A U.S. green card holder;
  • An individual who meets the U.S. substantial presence test;
  • A U.S. domestic partnership;
  • A U.S. domestic corporation;
  • A U.S. domestic trust; or
  • Any estate other than a foreign estate within the meaning of IRC 7701(a)(31)(A).

Am I responsible for a Form 3520 or Form 3520-A filing?

Generally, the person defined as the transferor is the responsible party who must ensure that all required information is provided to the IRS.  The responsible party is also the person who would be required to pay any applicable penalties and/or interest regarding delinquent informational reporting.

A U.S. transferor is any U.S. person who:

  • Creates or settles a foreign (non-U.S.) trust
  • Directly or indirectly transfers money or property to a foreign trust;
  • Makes a sale to a foreign trust if such sale was to a related foreign trust;
  • Makes or guarantees a loan to a related foreign trust; or
  • Is the executor of the estate of a U.S. person, and:
    • The decedent made a testamentary transfer to a foreign trust;
    • Immediately prior to death, the decedent was treated as the owner or any portion of a foreign trust; or
    • Any portion of a foreign trust’s assets were included in the estate of the decedent.

When must Form 3520 and Form 3520-A be filed?

Form 3520 must be filed by the 15th day of the 4th month following the end of the U.S. person’s taxation year.  As individuals file on a calendar year basis, this would mean that the deadline to file is April 15th.  However, if the individual is granted an extension of time to file their U.S. income tax return (Form 1040 or Form 1040NR), then the due date for filing Form 3520 is extended to the 15th day of the 10th month following the end of the U.S. person’s taxation year (October 15th for individuals).

Form 3520-A must be filed by the 15th day of the 3rd month following the end of the foreign trust’s tax year.  For accounts such as the TFSA, RESP, and RDSP, that year-end would be on a calendar year basis, which would mean that the deadline to file is March 15th.  However, there is the ability to file an extension which would then extend the filing deadline by six months from the original filing deadline (September 15th for calendar year ends).

What if I file late?

Penalties may apply if a taxpayer files late, but penalties can also apply if what the taxpayer files is incomplete or incorrect.  That is why it is important that these forms are completed appropriately and on time.

For Form 3520, the penalty structure is as follows:

  • For Parts I and III of the form, the initial penalty is the greater of $10,000 USD or 35% of the gross reportable amount.
  • For Part II of the form, the initial penalty is the greater of $10,000 USD or 5% of the gross value of the portion of the foreign trust’s assets treated as being owned by the U.S. person at the close of the taxation year.
  • Additional penalties may be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.

For Form 3520-A, the penalty structure is as follows:

  • The greater of $10,000 USD or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the U.S. owner at the close of the taxation year.
  • Additional penalties may be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.

Note that the Form 3520-A penalties are in addition to the Form 3520 penalties; therefore, it is possible to be looking at a starting penalty of $20,000 USD per account per year for non-compliance on these two forms alone.

What happens if I’m already late?

Not to panic!

The IRS does have voluntary disclosure programs available to taxpayers who have become delinquent in their filings.  The purpose of these voluntary disclosure programs is to allow taxpayers an avenue to “come clean” and get caught-up with their filings without complete fear of these material penalty amounts for each delinquent tax year for each account; however, the caveat is that filing under these voluntary disclosure programs does not mean that the taxpayer is free and clear from an audit or review in the future.

If you require assistance with your Form 3520 and Form 3520-A filing, whether delinquent or not, please call us at 403-250-5111 or submit an inquiry via our “contact us” page to schedule a time to meet with a Quon & Associates professional to assist you.

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