updated 6:36 PM CET, Mar 18, 2023

Tax expert warns Americans with Foreign Trust Forms 3520, 3520-A: IRS may be after you

The notoriously cash-strapped Internal Revenue Service is expected to look for help in filling its coffers next year and beyond from Foreign Trust tax forms 3520 and 3520-A – two information-reporting tax forms that are already familiar to U.S. tax experts for their complexity – a well-known tax specialist has said. 

Virginia La Torre Jeker, a Dubai-based U.S. expat tax law practitioner, sounded the alarm in her latest blog, which is read by other tax practitioners, legal experts and worried clients who are trying to stay informed on the issues that may affect their wealth and savings.

According to La Torre Jeker, Foreign Trust forms 3520 and 3520-A – which are filed with respect to non-U.S. (i.e., “foreign”) trusts with U.S. owners – were included on a recently-published IRS list of more than 50 “Large Business and International Active Campaigns” that the U.S. tax collecting agency said it would be focusing its attention on, going forward.

This particular campaign, La Torre Jeker quoted the IRS as saying, will take a “multifaceted approach” to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of, and transactions with, foreign trusts.

“The agency will address noncompliance through a variety of ‘treatment streams’, including audits and penalty assessments for late or incomplete forms,” La Torre Jeker added, still quoting from the IRS.

What constitutes a trust

La Torre Jeker went on to note that those Americans whose finances span one or more international border may wish to make sure their reporting arrangements are correct, as the IRS’s definition of what constitutes a “trust”, with respect to these particular tax filings, isn’t always obvious.

“Once it is determined that the entity is properly classified as a “trust”, the next task is to determine if it is a U.S. (domestic) trust or a “foreign” trust,” she adds.

“Whether a trust qualifies as “foreign” is, in itself, a complicated topic and is examined in an earlier blog post.”

As reported, an experienced U.S.-based certified public accountant went public last year with his problems filing some forms 3520-A on behalf of clients, which led to them being hit with eye-wateringly-large fines.

In an article for a California-based tax journal, at the time, the CPA, Gary W. Carter, of Minnesota, observed that the scale of the penalty notices dished out to some of his clients suggested these forms could represent a huge, if not a particularly tax-payer-friendly, money-maker for the IRS.

In March of this year, the IRS announced a new “revenue procedure” it said was aimed at exempting from foreign trust information reporting requirements certain U.S. individuals' transactions with, and ownership of, certain “tax-favored foreign trusts". The new procedure was generally aimed at certain foreign retirement or pension plans that could be characterized as “trusts”, but as reported, tax experts were skeptical that this new "procedure" would achieve much, if anything, in the way of clarifying which plans might be exempt from the reporting rules.

La Torre Jeker seems equally skeptical, urging anyone with a financial instrument likely to be regarded by the IRS as warranting a Form 3520 or 3520-A to be zealous in ensuring it is reported correctly.

Because if it isn’t, “Oh! The penalties!” she said in her recent article, pointing out that the penalties can be “simply outrageous,” including an initial penalty “equal to the greater of US$10,000 or the following (as applicable):

• “35% of the gross value of any property transferred to a foreign trust by a U.S. person

• “35 % of the gross value of the distributions received from a foreign trust by a U.S. person

• “5% of the gross value of the portion of the foreign trust's assets treated as owned by a U.S. person under the grantor trust rules”. 

Virginia La Torre Jeker cropped croppedVirginia La Torre Jeker is, as reported above, a long-time U.S. expat tax law practitioner, who has been a member of the New York State Bar since 1984. Now based in Dubai, she is also a prolific blogger, currently at us-tax.org, and previously at AngloInfo.com. To read this piece on her blog, where it's entitled “Foreign Trust Forms 3520 and 3520-A Penalties: A Potential Gold Mine for the IRS”,  click here.