US Agent & Foreign Trust
US Agent & Foreign Trust: When a U.S. person has to file a Form 3520 because they have an ownership in a foreign trust, they may have to provide a copy of the trust documents as well. This can be overburdensome and completely unfair to the taxpayer. In some instances, the foreign trustee may not want to cooperate with the IRS, and it may impact the U.S. owner.
Therefore, the trustee may consider appointing an U.S. Agent for the Foreign Trust. We will summarize US Agent & Foreign Trust requirements.
How to Appoint a U.S. Agent to a Foreign Trust
The Form 3520 instructions provide the following directions when it involves appointing a U.S. Agent to a Foreign Trust:
“A U.S. agent is a
U.S. person (defined later) that has a binding contract with a foreign trust that allows the U.S. person to act as the trust’s authorized U.S. agent in applying sections 7602, 7603, and 7604 with respect to:
• Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed, or required to be taken into account under the rules of sections 671 through 679, with respect to a foreign trust; or
• Any summons by the IRS for such records or testimony.
A U.S. grantor, a U.S. beneficiary, or a domestic corporation controlled by the grantor or beneficiary may act as a U.S. agent.
However, you may not treat the foreign trust as having a U.S. agent unless you enter the name, address, and taxpayer identification number (TIN) of the U.S. agent on lines 3a through 3g on page 1 of the form. See Identification numbers, later.
If the person identified as the U.S. agent does not produce records or testimony when requested or summoned by the IRS, the IRS may redetermine the amounts required to be taken into account with respect to the foreign trust by the U.S. owner. See section 6048(b)(2).
The agency relationship must be established by the time the U.S. person files Form 3520 for the relevant tax year and must continue as long as the statute of limitations remains open for the relevant tax year.
If the agent’s responsibility as an agent of the trust is terminated for any reason (for example, agent’s resignation, agent’s liquidation, or agent’s death), see section IV(B) of Notice 97-34.
In order to authorize a U.S. person to act as an agent for purposes of section 6048(b)(2) or for purposes of section 6048(c)(2)(A), the trust and the agent must enter into a binding agreement substantially in the format reflected under AUTHORIZATION OF AGENT in the Instructions for Form 3520-A, amended as required.
Attach a copy of the authorization to Form 3520.”
Missed Filing Form 3520
If you missed the filing of form 3520, it is important to speak with an experienced offshore attorney specialist before submitting a reasonable cause statement.
While a reasonable cause submission package cannot always to prevent the penalty without fighting it after-the-fact, oftentimes the penalty may have been avoided if the reasonable cause statement was better written.
Because when tax practitioners learn they missed the 3520 requirement — and the sheer magnitude of the penalties — they hurriedly submit a reasonable cause letter that lacks in substance and is less than persuasive.
“Penalties Section 6677
A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause).
Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).
• 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
• 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 in Part III.
• 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 (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II. Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if such person
(a) fails to ensure that the foreign trust files a timely Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries, or
(b) does not furnish all of the information required by section 6048(b) or includes incorrect information.
If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year in order to avoid being subject to the additional separate penalty for the foreign trust’s failure to file Form 3520-A.
For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as, April 15 for U.S. owners who are individuals), is considered to be timely filed. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.
Additional penalties will 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. If the IRS can determine the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year, then the additional penalties will be reduced as necessary to assure that the aggregate amount of such penalties do not exceed the gross value of the trust. For more information, see section 6677.
Reasonable Cause Form 3520
“No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. Note. The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause. See section 6677(d) for additional information. Section 6039F.
In the case of a failure to timely report foreign gifts described in section 6039F, the IRS will determine the income tax consequences of the receipt of such gift, and a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%).
No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. See section 6039F for additional information.
If a U.S. owner of a foreign trust is subject to a penalty imposed under section 6662 for an underpayment of tax required to be shown on a return, then such penalty may be increased under section 6662(j) for any portion of an underpayment which is attributable to any transaction involving any asset with respect to which information was required to be provided on Form 3520-A.
For more information about undisclosed foreign financial asset understatements, see section 6662(j).
No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See section 6662 and section 6664(c) for additional information.”
Foreign Gift, Trust, and Inheritance Tax Specialist Team
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