You may have already triggered reporting events and be already facing potential liability. Reporting requirements come with both significant civil and criminal penalties.
Form 3520 is an annual return to report transactions with foreign trusts and receipt of certain foreign gifts.
§6048 Reporting Requirements:
General Reporting on Foreign Trust Transaction - The responsible party must file the form 3520 within 90 days after the reportable events. 26 USC §6048(a)(1). The notice (form 3520) must contain amount of money or property transferred to the trust in connection with the reportable event, and the identity of the trust and each trustee and beneficiary of the trust. Id. §6048(a)(2).
The reportable events include: creation of a foreign trust by the US person (meaning US citizen, US resident, domestic corporation, partnership, US estate, US trust (Id. §7701(a)(30))); transfer of money or property (directly or indirectly) to a foreign trust (Id. §7701(a)(31)(B)) by US person; death of a US citizen or US resident if the decedent was treated as the owner of any portion of a foreign trust or any portion of a foreign trust was included in the gross estate of the decedent. Id. §6048(a)(3).
Form 3520 must be filed within 90 days following the reportable event. Persons required to file this form are the Grantor, Transferor, and Executor of the Estate. Id. §6048(a)(4). Person who fails to report creation or transfer may be subject to penalty equal to 35% of the gross value of transferred property. Id. §6677(a).
Beneficiary - US persons receiving a distribution from a foreign trust must file Form 3520. Id. §6048(c). This is required even if it is not a taxable distribution. Loan from foreign trusts are also treated as a distribution for this purpose. Id. §643(i). Person who fails to report distribution may be subject to penalty equal to 35% of amount of distribution. Id. §6677(a).
Owner - US Person who transfers money or property to foreign trust, may be treated as owner of foreign trust and required to file Form 3520. Id. §6048(b). U.S. transferors are treated as the owner of the foreign trust under the grantor trust rules (26 USC §671 through §679) if the U.S. transferor retains any grantor trust powers over the foreign trust or if the foreign trust is treated as having a U.S. beneficiary. US persons treated as owner of foreign trust is required to ensure foreign trustees file Form 3520-A.
The U.S. owner may be subject to a penalty equal to 5 percent of the gross value of reportable portion of the foreign trust assets. Failure to file required forms 3520 or 3520-A could also lead to criminal penalty.
§6039F Reporting Requirements:
Form 3520 reporting is required for US persons receiving large gifts, including bequests, from foreign persons. 26 USC §6039F(a).
US persons must report the receipt of gifts from No-Resident Alien individuals or foreign estate, if the aggregate amounts of gifts for the year from that individual or estate exceeds $100,000. However, note that the threshold for the gift from foreign corporation or foreign partnership is $10,000, (modified by cost of living adjustment to $16,111 in 2018). Notice 97–34 in 1997.
Foreign gifts are any amount received from a person other than US persons which the recipient treats as a gift or bequest (Id. §6039F(b)) unless the gifts are considered as the qualified transfers including transfers for educational or medical expenses under §2503(e)(2).
Penalty applies for non-reporting by 5% of the value of the gift for each month not reported not to exceed 25% in the aggregate. §6039F(c).
For the gifts from No-Resident Alien individuals or foreign estate, once the $100,000 threshold is met, each gift over $5,000 must be separately identified although the identity of each donor is not initially required. If there is a gift from a foreign corporation or partnership that exceeds $10,000 (modified by the cost of living adjustment), then it must include identification of all purported gifts with donor.
Gifts from related parties must be aggregated for purposes of determining the threshold amount. For example, assume U.S. person A received the gifts from A’s brothers B and C (foreign individuals). During the year, B made a gift of $100,000. C made two gifts, $4,000 and $3,000. Since B and C are brothers, the amount must be aggregated. A must report the receipt of the gifts by the amount of $107,000, which exceeds the threshold amount of $100,000. A must separately identify the gift from B. A do not need to separately identify two gifts from C because each gift from C is less than $5,000. Since B and C are both individuals, A do not have to identify the donors.
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