How Do I Handle the Reporting Requirements for Foreign Trusts or Foreign Corporations?
The IRS keeps a watchful eye on Americans who are involved in foreign financial matters, such as foreign trusts and corporations. If that sounds like you, you might have a few reporting requirements.
If you are the owner of a foreign trust or are involved in a foreign corporation, you may have to file various tax forms with the IRS. Concerning foreign trusts, relevant tax forms include IRS Forms 3520, 3520-A, 8938, and Financial Crimes Enforcement Network (FinCEN) Form 114. When it comes to foreign corporations, relevant tax forms include IRS Forms 5471, 1120-F, and FinCEN Form 114. Americans who do not follow reporting guidelines for foreign trusts or corporations might face heavy penalties from the IRS. This may be the case even if you have a relationship with a foreign trust or corporation as an American expatriate.
To figure out your reporting requirements for a foreign trust or corporation, call the tax CPAs for American expatriates at US Tax Help at (541) 362-9127.
IRS Reporting Requirements for Foreign Trusts and Foreign Corporations
If you are an American citizen who has a relationship with a foreign trust or corporation, you may have some reporting liability to the IRS. Reporting requirements vary and might include filing IRS Forms 3520-A, 8938, 5471, 1120-F, and more, depending on your specific situation.
Forms 3520 and 3520-A
If you become the trustee of a foreign trust, you will likely have to file IRS Forms 3520 and 3520-A. Form 3520 concerns your ownership of a foreign trust. This is how you will report gifts or trust distributions to beneficiaries. If you receive a large gift from a foreign entity or trust, you may also have to file Form 3520, even if you are just a beneficiary and not a trustee. Form 3520-A is the annual information return for a foreign trust. This is how you will report the income to a foreign trust, its gains, losses, distributions, and more. These forms are typically due by Tax Day. However, if you are an expatriate who has become the owner of a foreign trust, you will get an automatic two-month extension for filing Forms 3520 and 3520-A. If you have to file Form 3520-A but do not do so, you might be fined 5% of the gross value of the portion of the assets in the foreign that you own.
Foreign trusts with American agents must file Form 8938 if their aggregate foreign financial assets exceed $50,000 on the last day of the tax year or more than $75,000 on the last day of the tax year. This is the reporting threshold for foreign trustees who live in the United States. If you are an expat, the reporting threshold for trusts with foreign financial assets will differ. Form 8938 is an information return only and is not used for tax purposes. Its purpose is for the IRS to monitor foreign financial assets held by Americans, such as foreign trusts. The initial penalty for not filing Form 8938 when required is $10,000, up to $50,000.
FinCEN Form 114
Suppose you are the owner of a foreign trust or corporation with a financial interest or signatory power over a financial account located outside of the U.S. that exceeds $10,000 at any point during the tax year. In that case, you will have to file FinCEN Form 114. This form is also known as a Report of Foreign Bank and Financial Accounts, or FBAR. Our tax CPAs for American expatriates can help you file an FBAR using the BSA e-filing system from the Financial Crimes Enforcement Network. Again, this report is for informational purposes only, not tax purposes. FinCEN Form 114 is due by Tax Day. Penalties for failing to file an FBAR tend to add up to thousands of dollars.
Any U.S. person who is an officer, director, or shareholder of a foreign corporation has to file IRS Form 5471. This form comes with various corresponding schedules that might need to be completed regarding income, tax earnings, company organization, and more. You can submit Form 5471 alongside your annual tax return. Failure to file Form 5471 completely might lead to an initial $10,000 financial penalty from the IRS. If the issue is not rectified within 90 days, an additional $10,000 penalty will be applied for each subsequent 30-day period the form is unfiled, up to a total fine of $50,000. Further civil and criminal penalties might follow, depending on the severity of the reporting infraction.
Foreign corporations that do business in the United States must file IRS Form 1120-F to report income, gains, and losses and to determine their tax liability. This will be the tax return for your foreign corporation. Penalties for failure to file IRS Form 1120-F when required are 5% of the unpaid tax, up to 25%. In general, Form 1120-F is also due by Tax Day.
Other Tax Forms
Depending on your specific relationship with a foreign trust or corporation, you might have additional filing requirements. Our tax accountants can review your situation to confirm which forms you must complete and send to the IRS by Tax Day. Even though the trust or corporation is outside of the U.S., your relationship to the entity as an American citizen is of interest to the IRS. Confirming your reporting and tax liability is crucial, as the IRS tends to heavily penalize individuals who do not adhere to filing requirements, even if they do so out of sheer ignorance. It is important to be proactive and figure out how to inform the IRS of your dealings with foreign trusts or corporations so that you are not civilly or criminally penalized.
Contact Our Tax Accountants Today
Call our tax CPAs for American expatriates at (541) 362-9127 to get assistance from US Tax Help today.