Prologue – The “Take Away” And Summary For Americans Abroad
A Mexico Land TRUST, is not a FOREIGN TRUST for IRS purposes – ("cannot be what it isn't"). But, a Liechtenstein “Stiftung” – private FOUNDATION with no reference to the word TRUST is a FOREIGN TRUST for IRS penalty purposes – ("would be what it isn't"). https://t.co/3qaB8NWrnFpic.twitter.com/iHkZMP8iAS
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 16, 2022
The general message is contained in the above twitter thread. Americans abroad are likely to have financial involvements with a number of different kinds of “entities” that are “local” to them and “foreign to the United States. Examples may include: pension plans, tax advantaged savings plans, small business corporations and more. The descriptive title of these “entities” is irrelevant to their classification under US tax rules. What an individual understands to be a foundation, trust, corporation, pension or anything else could be classified under US tax rules in in a number of different (and unexpected) ways. The US classification for tax purposes will be determined by the “facts and circumstances” and characteristics of the entity. Furthermore, the classification will determine BOTH (1) how the entity is subject to US taxation and (2) the specific reporting requirements (and potential penalties) that apply to that entity.
(It is important for Americans abroad to understand the risk that income earned by the “foreign to the US” corporation or trust (but local to them) may be deemed to have been earned by the individual. This may be true even when that income has not been received by the individual. This is the consequence of Subpart F, GILTI and the Grantor trust rules. These specific topics will be left for separate posts.)
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:
Discussion with @IRSMedic and @Keith__REDMOND about defensible compliance: Foreign Trusts, Form #3520 + Form #3520A – To be a "Foreign Trust", it must be a "trust". When in doubt about whether it's a "trust", is it safer to file a 3520 or NOT file a 3520? https://t.co/LNV0ady090
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) August 10, 2019
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!
Article XVIII of the Canada U.S. Tax Treaty Continued – The question of the TFSA
It's 2022 and time to revisit the issue the US taxation of the #TFSA: "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" https://t.co/1qVKlrz0Po via @expatriationlaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 10, 2022