Tag Archives: Foreign Trust

Treasury exempts applicable “tax-favored foreign trusts” from the Form 3520 (and therefore Form 3520A) requirement

Introduction – A small step for forms, one giant leap for “formkind”

It’s true. Many Americans abroad may no longer be required to file Form 3520 and Form 3520A to report their lives abroad! Early indications appear that many Americans will (assuming their retirement vehicle does qualify as a trust) not be required to report on Form 3520. This new initiative from Treasury a positive step in the right direction.

I have long thought that Treasury could solve many of the problems experienced by Americans abroad. Here is a wonderful example of Treasury taking the initiative to clarify the obvious:

Americans abroad do NOT use non-U.S. pension plans and non-U.S. tax-advantaged investing accounts to evade U.S. taxes. Hence, there is NO reason for the Form 3520 reporting requirement. This is an example of the tax compliance industry sitting down with Treasury, explaining a problem and getting a resolution. I suggest (and hope) that the same can be done for PFIC (Form 8621), Small Business Corporations (Form 5471) and other penalty-laden forms.

Yes, this announcement from Treasury in the form of RP 20-17 is a great achievement. Although it certainly doesn’t solve all the problems, it’s:

A small step for forms, one giant leap for “formkind”

The background to this problem – It starts in 1996 (same year as the beginning of the Exit Tax)…

Since 1996 Internal Revenue Code 6048 has required extensive reporting of almost any interaction with a foreign trust. Treasury has required that the reporting take place on Forms 3520 and 3520A. The forms are complex and subject to the draconian penalty regime described in Internal Revenue Code Section 6677. In order for an entity to be a foreign trust, it must be a trust. A “trust” for IRS purposes is defined by the Treasury Regulations as:

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To be FORMWarned is to be FORMArmed! The easiest way to receive a Form 3520A penalty would be to file a Form 3520


There is evidence from both tax practitioners and from individuals that Americans abroad are suffering from a “Form 3520A” penalty epidemic. Some of the best discussion of both the scope and technicalities of this problem may be found at Tax Connections. See particularly the posts here, here and here. (Mr. Carter’s original post was also reproduced at American Expat Finance.) The posts have attracted commentary from a number of tax professionals. The IRS Taxpayer Advocate has been invited to intervene.
“Tax Compliant” Americans Abroad are just a penalty waiting to happen!
Americans abroad are potentially required a very large number of IRS forms.
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Canada U.S. Tax Treaty: Why the 5th protocol of the Canada US Tax Treaty Clarifies that the TFSA is a pension within the meaning of the Canada U.S. Tax Treaty

Article XVIII of the Canada U.S. Tax Treaty Continued – The question of the TFSA
In a previous post I discussed how a U.S. citizen moving to Canada with an existing ROTH will be treated under the Canada U.S. Tax treaty.
The purpose of this post is two-fold:
First,to argue that the the TFSA should be treated as a “pension” within the meaning of Article XVIII of the Canada U.S. Tax Treaty; and
Second, to argue that the 5th protocol (which clarifies that the ROTH IRA) is a pension within the meaning of the Canada U.S. Tax Treaty means that the Canadian TFSA has the same status.
This will be developed in three parts:
Part A – How the Canada U.S. Tax Treaty affects U.S. Taxation of the Canadian TFSA
Part B- Wait just a minute! I heard that the “Savings Clause” means that the treaty would not apply to U.S. citizens?
Part C – The TFSA and Information Returns: To file Form 3520 and 3520A or to not, that is the question
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