Liberty and justice for all United States persons abroad

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US expat tax and FBAR: Discussion thread (Ask your questions) Part Two

Please ask your questions here about US Expat tax and FBAR.

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NB: This discussion is a continuation of an older discussion that became to large for our software to handle well.  See US expat tax and FBAR: Discussion thread (Ask your questions) Part One.

3,618 thoughts on “US expat tax and FBAR: Discussion thread (Ask your questions) Part Two”

  1. @Sad, I think a U.S. person only has to file a 3520 if they come into a foreign inheritance of over $100,000.

  3. 3520 and 3520A are for “foreign trusts” (vs inheritance through a will???)

    Taken from Renounce’s “Why US citizens in Canada should NOT invest in TFSAs or any other “Foreign Trust” (RRSPs excepted)” http://renounceuscitizenship.wordpress.com/2012/10/05/why-us-citizens-in-canada-should-not-invest-in-tfsas-or-any-other-foreign-trust-rrsps-excepted/

    Note: Canadian Registered Plans (not foreign to us as these are accounts of the country in which we live) — Tax Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) are foreign trusts and require filing of 3520 / 3520A. (… and similar plans considered “foreign trusts” in other countries.)

    From the IRS – As of October 5, 2012 – Seeing Is Believing – Note the Principle of Penalty

    Form 3520 – This is the information the taxpayer must provide

    http://www.irs.gov/instructions/i3520/ch01.html

    Penalties

    The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust: (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(b). Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.

    Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.

    Penalties may also be imposed under section 6662(j) for undisclosed foreign financial asset understatements.

    Reasonable cause. 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.

    Form 3520 A:

    http://www.irs.gov/instructions/i3520a/ch01.html

    Purpose of Form

    Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.

    Who Must File

    A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.

    Exception. Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a U.S. citizen or resident alien interest holder who is eligible to file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF. In addition, other eligible Canadian plans within the meaning of section 3 of Rev. Proc. 2002-23, 2002-15 I.R.B. 744, are relieved of any obligation to file Form 3520-A with respect to a U.S. citizen or resident alien beneficiary who has made an election in accordance with section 4 of Rev. Proc. 2002-23 and has complied with the annual reporting requirements of Rev. Proc. 2002-23.

  4. What about other retirement vehicles LIF’s. Are these foreign trusts? Doesn’t everyone over 71 have to converrt their RRSP into a RRIF or LIF? I heard that recently retirees were allowed to put 50% of their RRSP into a LIF.
    What is the penalty if no 3520-A has been filed?

  7. Unfortunately there are numerous errors in this piece by Sam brady. We should be all aware of the theoretical US estate tax on US situs assets. However those of us living in Canada with for example 100K in US stocks will not have a problem. The stocks can be sold by the estate and the IRS can be ignored. The exemption has now been solidified at 5 million plus per person. A family of 2 can leave 10 million tax free. The trick is to not own a US condo in Florida when you die. Filing the US estate tax return is onerous even if no taxes are owing. If you have heirs in the states or your executor has US ties- a trust company for example- get good professional advice.

  8. Thanks Duke. Seems though that the US is continually trying to figure out how to enmesh people and enlist more ‘taxable persons’. Problem is, if you’ve bought a property, and the rules can change, then you’d have to keep monitoring the tax laws, and be ready to divest if necessary. Seems too much hassle, too complex. Why bother?

  12. re: Inheritance taxes. We had advice from lawyer & accountant a year ago. Yes I would be taxed on inheritance from my non US husband. We have a family business run as a partnership with substantial assets and should something go horribly awry I would have had a big problem with US tax liability. We re-wrote our wills because of this. My husband is leaving his share in a special kind of trust that I will not control & will only allow enough released to maintain me in the same standard of living that I am currently at. I am hoping of course that it will turn out to be unnecessary but we’re just the kind of people that don’t like to leave things to chance.

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  16. @calgary411 and @tdott: As to whether “3520 and 3520A are for “foreign trusts” (vs inheritance through a will???)”, the following wording seems to imply that inheritance through a will is included in the 3520:

    Paragraph 4 of the “Who Must File” section of the Form 3520 Instructions states:

    “4. You are a U.S. person who, during the current tax year, received either:
    a. More than $100,000 from a nonresident alien
    individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;”
    ———–
    @tdott
    A further thought on the question: “Are USC recipients of inheritance taxed on the money?” I seem to remember a special situation when they may be (completely separate from penalties for not reporting the inheritance if 3520 thresholds apply), and that is if the bequestor is a FORMER “US person” who expatriated and met the threshholds/circumstances where they were considered to be a “COVERED EXPATRIATE”, and the recipient is a “US person”.

    It’s only in the back of my mind, and would need verification, but I remember thinking that the intent seemed to be to drop onto the recipient of the legacy the responsibility for the estate tax that can no longer extracted from the estate itself.

    [Odd how that reminds me of accounts from the wilder side of New York city during the prohibition years…. Oh well, I’d better not go that way now…..!)

  17. @northof49 says

    “Yes I would be taxed on inheritance from my non US husband. ”

    Let them come get you.

  18. If you just wanted to renounce ASAP, is it necessary to care about Form 8854? I have no assets in the US and no desire to ever cross the border again in my life. I have filed past tax returns on personal income (wages) but have now found out that my business returns should have been included and that I might be subject to something called Subpart F. The accountant I spoke with has estimated 30K+ in fees just to complete the forms for 5 years.

    I can’t be bothered with this nonsense. Has anyone else renounced without filling out this form?

  21. We have lots of stories about the OVDI & OVDP mess. I don’t remember Reading many reports of penalties dealt out for quiet disclosures. Might it be wise to have a separate post where folks might want to share their experiences?
    Reasons for asking—-the internet update on the IRS site seems to have removed the infamous FAQ 35, and there seems to be much more in there about just filing FBARs and showing reasonable cause and such. Many people have already performed quiet disclosures in the last 6 months and obviously haven’t Heard anything yet.
    Such examples can be used when discussing with congresspersons, media, or such, to explain the seriousness of this. (OVDI & OVDP are special cases which might be less relevant to such discussions (the bait & switch program))

  22. @Mark Twain, that sounds like a good idea. I renounce next week and then have to sort out the tax side as I have never filed in my life. I’m going to avoid the OVDI if I can; the quieter the better as far as I’m concerned. I’ve been recommended to contact the ACA here in Switzerland to see what help/advice they can give me on sorting the mess out. A separate section where people can find info on quiet disclosures easier than wading through all the OVDI stuff too would be helpful I think.

  23. @Medea Fleecestealer

    The quiet disclosure issue is full of controversy and disagreement between different Tax practitioners,and, as they say, “it all depends”. There is NO one authoritative source. However, there is one thread here, that had a lot of active discussion between attorneys about it, that might show you the range of opinions and help you out. Read through it all, and see if it brings the subject into focus for you.

    http://isaacbrocksociety.ca/2012/05/26/why-is-the-quiet-disclosure-qd-so-controversial-between-practitioners/comment-page-1/#comments

  24. that doesn’t sound good: renouncing and then beginning to file USA taxes? One is supposed to assume that renunciation isn’t the end?

  25. regarding quiet disclosures, I was getting the feeling that the IRS was more and more allowing or recommending it—FAQ 35 is gone? KPMG and the London IRS attache recommending “just attach a sweet Little note with reasons for reasonable cause” or however it went?

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