Tag Archives: form 3520

Foreign Inheritance and Gift Tax Planning and Strategies

The IRS headline Aliens with any U.S. Assets Must File Estate Tax Returnsis shocking to their adult children.

And, it gets worse for those decedents owning foundations, foreign trusts, foreign companies, Stiftung, and Anstalts.   The heirs could owe the IRS both estate taxes and income taxes on their inheritance.

The label of the entity (such as trust) does not decide the entities IRS tax classification.     An entity labeled a “trust” can be classified for tax law a corporation.  Similarly, a foreign corporation can be categorized by the IRS as a trust.

Suzan’s father is a French citizen.  When he passed away, he was residing in Spain.  To avoid French and Spain taxes, he formed a Panama foundation.  In our telephone calls, Suzan labeled the foundation as a Panama trust.

As you expect, U.S. taxation of a foreign trust is very different from a foreign corporation.  Two factors differentiate corporations from trusts.  They are:
(1) the presence of associates; and
(2) the objective to carry on business and divide the gains.

One court case held that term “associates” does not mean plural.  The court held that a trust with a single beneficiary has associates.   Because of this case, the IRS seems to be focusing on the objective to carry on business.   An IRS legal opinion, on this link, highlights this.

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IRS Wipes Out “Penny Wise and Dollar Foolish” Self-prepared Form 3520 Reporting Foreign Gifts and Inheritance

form 3520, how to prepare from 3520, foreign gift, foreign inheritance, U.K. inheritance,

“Penny wise and dollar foolish” was one of my mother’s favorite saying. Doing the IRS Form 3520 yourself is foolish.

Another day and an another email from a poor soul preparing Form 3520.  This form is multipurpose.  One purpose is to track assets transferred to U.S. taxpayers.   The goal of the Form 3520 is to place a bullseye on you.

Most people hate reading instructions.  So, they just follow the form and ignore the instructions and the complex requirement found only in IRS regulations.    And there are even more deadly problems that make you an IRS target.

I will discuss those problems below;  however, first, please hire a certified public accountant or an international tax attorney to prepare the Form.  Next, retrieve all of the information from the deceased’s estate.  An IRS audit occurs a few years after you file the Form and by then the information may be misplaced.

  1.   The IRS is hunting for hidden offshore taxable income with the Form 3520.

    Besides looking for gift taxes and estate taxes, the IRS is looking for the tax evader.   The IRS examines the recipient looking for disguise income.   Tax evaders often claim the money they receive is a gift from a “friend” or distant relative or a foreign corporation.

  2. The IRS is hunting for gift taxes and generation skipping taxes for gifts by non-resident (domiciled) aliens from a U.S. bank account.

    The alien does not have the $5.5 million dollar gift and estate tax exemption.   In fact, they have almost no exemption, at all.   Gifts of money can be taxable. Gifts of money to a grandchild can be taxable twice (the gift tax and the generation skipping tax).   If you report a gift made by a transfer from a U.S. bank account, expect an examination and expect to owed taxes.

  3. The IRS is hunting for estate taxes for assets owned by a foreign corporation by the non-resident alien.

    Once again, so many emails and phone calls from U.S. taxpayers inheriting a foreign corporation  (this week it seem to be Panama companies).   Assets owned by a foreign entity are owned by the shareholder (learn more on this link).

    You (and the foreign estate) do have tax planning options but you need an international tax professional to select the correct strategy.

    The non-resident alien’s U.S. estate tax exemption is less than $60,000 (unless an estate tax treaty applies).   If the foreign corporation owns shares of U.S. companies (including those on the stock market) or U.S. real estate, then taxes are due.

    You personally owed the estate taxes or gift taxes since you received the property.  This is known as “transferee liability”.  Besides owning the taxes, you will owe a tax penalty and also interest.   You should expect about fifty percent of the amount you received to be paid to the IRS.    Of course, you will need a professional to represent you.

    The typical fee for a Form 3520 preparation is about $5,000 unless your relative owned a foreign foundation.   If so, then you have the complex issue for a non-grantor foreign trust (learn more on this link).

 

Using Foreign Trust to Protect Your Assets and Avoid Taxes

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,Way before trusts was a key vehicle for estate and income tax planning; trusts protect assets. When I say “Way before…”, I mean a 1,000 years before. Trusts started with the Great Crusades (there was more than one Crusade, and they last for almost three centuries).

Despite their importance, the tax code does not define a trust. The IRS has a hint of a definition in a regulation.

This regulation defines the term “trust” an “arrangement” whereby trustees take title to property for the purpose of protecting or conserving it for beneficiaries under the ordinary rules applied in chancery or probate courts.

So, let us stop here with the words “take title to property.” A nominee takes title of ownership and is not a trustee. You can learn how to save taxes with a nominee arrangement on this link.

America has trusts because our mother country is England. Trusts were “invented” during the Great Crusades. Knights went off to the Middle East. If they returned, it was after many years. If you died, the King took all your land to distributed it to another knight or lord. To protect the wife and children, the knight would place the title of the land in the name of his best friend. Often the King would not know that the knight died because he did not return.

Court cases decided the duties of his best friend over the last ten centuries.

Under IRS regulations, the classification of an arrangement as a trust is resolved by examining whether the arrangement protects assets under the law of equity for beneficiaries. As you can see, protecting assets is a key part of a trust.

All trusts can protect assets for everyone except for the settlor. When the settlor includes himself as a beneficiary, the trust is called a self-settled trust. A few states and a few countries have a law that allows a self-settled trust asset protection to the settlor.

IRS CONCERN ABOUT FOREIGN TRUSTS. THEY JUST AREN’T SURE WHY.

While the trust is a well-recognized estate-planning creature of the legal system, the IRS has expressed its concern about trust arrangements that abuse the tax regime. The IRS fears that some trust arrangements are not acceptable and they avoid taxes. The IRS collects information on Form 3520-A. This form tells the IRS nothing.

Oh yes, the IRS knows that the Form is useless. The American Institute of CPAs sent the IRS a long letter with suggested improvements. The IRS promptly put the letter in the “circular file” aka trash can.

INTENT OF CONGRESS — IS TO  ALLOW FOREIGN  TRUSTS

While the IRS has concerns about the misuse of trusts, and in particular foreign trusts, Congress responded in 1974 and 1976 by deciding, essentially, that foreign trusts will not be prohibited.
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IRS Updates Foreign Trust Tax Planning and Reporting

Offshore Trust International Tax Strategy and Planning is a sophisticated concept used by the wealthy. Learn more in my book, International Taxation in America, available at Amazon.

Offshore Trust International Tax Strategy and Planning is a sophisticated concept used by the wealthy. Learn more in my book, International Taxation in America, available at Amazon.

There are many legitimate reasons why you might create a foreign trust or have transactions with a foreign trust.  

 Foreign trusts can be a wonderful foreign tax planning entity.   They can protect assets.  They can give you control of how your heirs will manage their inheritance.  Lastly, a trust can move from country to country.    This called a change of trust situs. 

The IRS has updated their website. I assembled the information below from various IRS web pages.  The IRS updated information is in blue below.
If you need to learn more ways to save taxes, then get my easy to read book from Amazon on this link for $9.50.

 Here are the key concepts:
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Foreign Trust Form 3520 IRS Erroneous Penalty Letters Terrorize Families and the AICPA’s response

Foreign Trust Form 3520 penalties are huge.   This Form reports inheritances and gifts from foreign family members and distribution from their trusts.

The AICPA in an attempt to have the IRS Commissioner to stop the terrorizing letters wrote this letter.

Here is what happens.   Americans receive a gift or bequest from a family member who is a non-citizen.  Being tax compliant they hire and pay a CPA to prepare Form 3520.

Remember, these are the honest and compliant taxpayers.   Meanwhile, the Commissioner of the IRS has the IRS back office in chaos (more on this link exposing theft of taxpayers refunds).    The back office staff gets confused and tells the computer to send out a big penalty notice as they input the Form 3520.

The taxpayer receives a penalty notice for 35% of the gift or bequest.   They or their CPA writes to the IRS, but the IRS computer continues to send out the penalty letter.   The letter has no contact person or telephone number.  Eventually, the computer starts the collection process.

The taxpayer receives repetitive terrorizing letters, until it goes to collection.   Now, the good news is that for a few $1,000 dollars you can hire an attorney to stop the collection process.   Until then, expect sleepless nights.

No income tax is due on a bequest, inheritance or gift.  The reporting a foreign trust’s  income and distributions to an American is on Form 3520-A.

So, why is the Form  3520 required? As far as I can tell, merely to assess a penalty.

I look forward to your comments on either my blog or on LinkedIn.  If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one-hour consultation.

P.S. After posting this, a CPA colleague contacted me.   His client was being terrorized.   The CPA called the IRS taxpayer advocate (the part of the IRS that is an advocate for taxpayers).   The advocate said nothing can be done.     When it goes to IRS collection, a human being will contact the client as they seize his property.

P.S.S.  Case in Point – Recent District Court Case- Compliant Tax Payer facing $600,000 Form 3520 Penalty. Here the  Form 3520-A was properly filed, reporting all of the foreign trusts income.  The taxpayer paid the $600,000 penalty.  He has sued the USA (that is us folks) for a refund. 

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Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods.

If you wish to brainstorm your tax ideas with me, Brian Dooley CPA, then please call me at 949–939–3414 for a free one-hour brainstorming consultation.

My easy to read book, International Taxation in America for the Entrepreneur provides tried and true international tax planning strategies.  Amazon has the Kindle version on sale for $9.50 on this link.

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA-TAMPA DIVISION

2012 PTC 237  August 14, 2012

BRIAN CHIVAS JAMES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.

8:11-cv-271-T-30AEP  ORDER

THIS CAUSE comes before the Court upon Defendant’s Motion for Summary Judgment (Dkt. #17), Plaintiff’s Response (Dkt. #18), Defendant’s Reply (Dkt. #23), and Plaintiff’s Sur-Reply (Dkt. #28). Upon reviewing the motion and responses, and being otherwise advised in the premises, the Court concludes that Defendant’s motion should be denied.

Background

Plaintiff Brian Chivas James is a Sarasota physician specializing in pain management. In 2001, looking to protect his assets from potential malpractice claims, James proceeded to create an irrevocable foreign trust in Nevis, West Indies, with First Fidelity Trust Limited (FFT) as its trustee. James initially funded the trust in 2001 with a contribution of $192,000. He made additional contributions of $805,000 in 2002 and $607,146 in 2003.

Under 26 U.S.C. 6048, the trust was required to file Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, which the trust timely filed for all relevant years. Also, as an owner of the trust, James was required to file IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. James failed to file the required Form 3520 for years 2001, 2002, and 2003.

James argues that his failure to file Form 3520 is the fault of his former accountant, George Famiglio. Famiglio had prepared James’s personal and business taxes for some years, and James relied on Famiglio to properly oversee and advise him about the tax requirements of the foreign trust. According to James, he or his agent timely provided Famiglio with all appropriate trust documents and information, for each year in question, yet Famiglio failed to timely file Form 3520, and/or advise James that it should be filed. James further contends that he was personally unaware of the requirement to file Form 3520.

James argues that he acted prudently and with sound business judgment in engaging Famiglio to handle all issues related to the foreign trust, and that his accountant simply dropped the ball. Although James does not remember the details of most conversations he had with Famiglio or any specific advice he received, he recalls that they “talked a pretty good bit” about the trust, and he believed at the time that “[Famiglio] had filed all the-everything required with the IRS.” In short, James argues that he had “reasonable cause” for failing to file Form 3520 by reasonably relying on Famiglio.

The Government contends that James lacks a reasonable cause. Noting that James was put on notice of the requirement to file Form 3520, the Government argues that his reliance on Famiglio cannot constitute reasonable cause. In 2006, the Government assessed penalties of $67,200, $281,750, and $230,000, for failure to file Form 3520 in years 2001, 2002, and 2003, respectively. James now sues for a refund of tax penalties, arguing that his failure to file Form 3520 was due to reasonable cause and not willful neglect.

If you want the full case, then please send me an email at [email protected]