Through a recent post at TaxProf Blog, I learned about the IRS’ Statistics of Income Bulletin. This finally gave me the lead on a figure in which I’d been interested for a long time: the number of Form 3520 filers. Unfortunately, the statistics are only released once every few years, and the next set aren’t scheduled for publication until December 2012. But you can see the figures for 1998, 2002, and 2006 here on the IRS website. The latest number: U.S. Persons filed a grand total of 1,952 Form 3520s and 3,819 Form 3520-As in 2006.
Most Homelanders think those filers are whales like Mitt Romney with “blind trusts” in the Cayman Islands. But as Phil Hodgen points out, other countries’ IRA-type accounts often meet the U.S. definition of “foreign trust” too. The IRS’ voluminous regulations on the subject make all sorts of exceptions to ensure that U.S. retirement accounts are not subject to onerous filing requirements, but offer no reasonable exceptions for non-U.S. retirement accounts. So, with the exception of Canadians with RRSPs (who file Form 8891 instead), you could easily end up paying more for an accountant to report your retirement contributions to the IRS than you contribute to your retirement plan. Of course, that only happens if you bother filing the stupid form. The number above suggests that very few do.
So what’s a decent percentage estimate of the compliance rate? Let’s start making a bunch of unrealistic assumptions in order to maximise the estimated rate:
- Take the Global Migrant Origin Database estimate that there are two million Americans residing abroad (in reality, the State Department estimate of six million seems more likely to be correct).
- Say one million of those reside in Canada and can all get by with just Form 8891 (in reality, many Canadians too should be Form 3520 filers, for example due to RDSPs).
- Of the remaining million, say half are retirees living off of Social Security and have never worked in foreign countries, meaning that they have no foreign retirement plans either.
- Of the remaining 500,000, say they’re all in households of one breadwinner who has a retirement account, and one non-breadwinning spouse and two kids who have never worked a day in their lives and thus don’t have retirement accounts (regardless that the U.S. labour force participation rate is in the mid-60s).
- And of those 125,000 breadwinners, say half are for one reason or another exempt from participation in a foreign retirement plan due to a “totalization agreement” or the peculiarities of their employment situation
- And of the remainder, say perhaps as many as half have plans that somehow escape the Form 3520 filing requirement (because, for example, their plans are PFICs and come under Form 8621 instead)
So even with this chain of dubiously skewed estimates, we’re still left with 30,000 to 60,000 Americans abroad who should be filing Form 3520. In otherwords, the upper bound for the Form 3520 compliance rate is about ten percent, assuming that every one of the filers recorded by the IRS is a U.S. Person abroad. If you make more reasonable estimates for the number of Americans abroad, the likelihood that they have a foreign retirement account, and the fact that the IRS statistics include Homeland filers as well, the Form 3520 compliance rate by U.S. Persons abroad rapidly starts to look like a rounding error.
To give an obvious example of this: the 2009 Statistics of Income Bulletin has a breakdown by country. Here in Hong Kong, there were a grand total of eight Form 3520-A filers in 2006, with total trust
assets income of US$148,000. No breakdown was provided for Form 3520. Hong Kong is not a popular jurisdiction for onshore American whales to form trusts, due to the various restrictions in the Trustee Ordinance on what kinds of assets a trustee can hold. But there are tens of thousands of Americans in Hong Kong. Most are employees of large companies — not self-employed, students, nor stay-at-home spouses — and therefore have accounts either under the Mandatory Provident Fund or the Occupational Retirement Schemes Ordinance.
A cynic might look at this situation and decide that the U.S. government is getting a higher level of compliance than that to which it is morally entitled: none. Legislators of the countries where we live have decided time after time that these retirement plans should enjoy simplified reporting and tax treatment in order to encourage local people and immigrants of all nationalities to save for retirement. The 535 imperialist occupants of the U.S. Capitol should not be invading other countries, ignoring our democratically-enacted laws, and generally wreaking havoc with our carefully-designed systems of tax incentives.
Of course, the low level of Form 3520 compliance arises not from principled resistance to extraterritorial taxation, but rather from ignorance of the filing requirements — compounded by the IRS’s complete unwillingness to give straight answers about whether a given non-U.S. structure or account is indeed a “foreign trust”. Many American expats happily delude themselves into thinking that they are fully “IRS-compliant” by virtue of filing Forms 1040 and 2555. They come by the Isaac Brock Society or read our comments at other sites and wonder what paperwork burdens we extremists are complaining about. All I can say to them is that I hope they wise up about their obligations and get them in order (and take steps to end those obligations, where appropriate), rather than finding out too late when they’re being herded into the OVDI under threat of 35% failure-to-file fines.