From the Tax Law Offices of David W. Klasing – Can a person who is both the owner and beneficiary of a foreign trust face duplicate penalties for failure to report in both roles? | national news
IRVINE, Calif., December 1, 2021 / PRNewswire / – The U.S. tax code imposes various foreign information and income tax reporting requirements whenever foreign income-generating assets may benefit U.S. taxpayers. These requirements differ depending on whether the US taxpayer is the owner or beneficiary of those assets, as in the case of trusts. But what obligations do taxpayers have when they are both the owner and beneficiary of a foreign trust? And what penalties do they face if they fail to comply with these obligations?
According to the Second Circuit in a recent ruling, taxpayers must still meet their obligations as the beneficiary of a foreign trust, even if they own it, and vice versa. Failure to report as required will result in penalties for the taxpayer, and its positioning as owner and beneficiary can double its exposure to penalties.
The only way to avoid these penalties is to comply with the onerous requirements imposed by the federal government. The best way to make sure you’re compliant is to work with tax attorneys and dual-licensed CPAs at tax law offices in David W. Klasing. Call our office today at (800) 681-1295 or schedule a low cost initial consultation online HERE.
Obligations and sanctions of the FBAR in the event of non-declaration of a foreign trust
Under Section 26 USC § 6048 (b) – (c), any U.S. citizen who owns or beneficiates of a foreign trust is required to file an annual return. Failure to file the specified return is a violation of the Internal Revenue Code (IRC) and subjects the violating party to substantial penalties. However, the reporting requirements and penalties for non-compliance differ depending on whether the offending party is the owner or beneficiary of the trust.
Obligations and penalties for beneficiaries of the trust
U.S. beneficiaries of foreign trusts must complete Form 3520 for each year they receive a distribution from the foreign trust. If the payee does not file a correct and timely return, the IRS imposes a penalty of up to 35% of the distribution. The deadline for filing Form 3520 as a beneficiary of a foreign trust is usually the same as the taxpayer’s regular filing deadline.
Obligations and penalties for trust owners
U.S. owners of foreign trusts, even partial owners, should ensure that the trust files both Form 3520 and Form 3520-A each year. The annual trust filing must include accounting information for all activities and operations of the trust.
US owners can file a replacement Form 3520-A if the trust does not. To do this, the owner should complete Form 3520-A to the best of his ability with the information he has and attach it to his Form 3520 when he files regularly. If the foreign trust and the US owner fail to make the required disclosure, the penalty to the owner is 5% of the gross amount to be reported.
The second circuit holds the defendant liable for the FBAR failure to report penalties as owner and beneficiary
In Wilson v. United States, Wilson was both the sole owner and beneficiary of a foreign trust. Wilson created the trust in 2003 to hold assets worth approximately $ 9 million. In 2007 Wilson wound up the trust and distributed the remaining assets, then valued at $ 9.2 million, to the sole beneficiary – himself.
District court proceedings
Wilson did not file Form 3520 in 2007 to report his distribution from the foreign trust. As the sole proprietor, Wilson also failed to ensure that Form 3520-A was filed on behalf of the trust. The IRS imposed the 35% penalty on the distribution, which amounted to just over $ 3.2 million. Wilson paid the penalty, but within two months of payment submitted a request for a full refund. Wilson argued that as an owner, the 5% penalty in § 6677 (b) should have applied, as opposed to the 35% penalty.
Wilson died while his case was pending and his estate took the case to court. The lower court allowed the estate’s summary judgment motion, stating that the IRS could only assess the 5% penalty under § 6677. Wilson’s estate also argued that the owner of a trust cannot should be required to file Form 3520 only once, as owner. The government appealed the decision, so the case reached the Second Circuit Court of Appeals.
Call and result of the second circuit
On appeal, the Second Circuit overturned the district court’s decision. In the opinion, the judge Richard C. Wesley indicated that the district court’s reasoning was flawed for two reasons. First, even if the owner was only required to file one Form 3520, filing the form without including all relevant information, such as distributions, is still an IRC violation. Second, a US taxpayer who receives distributions from a foreign trust is required to disclose those distributions, even if they own them.
In other words, the Second Circuit identified the two obligations as distinct from each other and therefore considered that the sanctions should also be applied separately. Under this ruling, ownership status in a trust will not allow FBAR violation targets to escape heavy fines for failure to disclose.
How to Avoid FBAR Penalties for Failure to Report
It can be difficult to determine if you are facing reporting obligations for offshore assets such as trusts without the help of a keen eye. Tax Lawyers and CPAs holding a dual license from the Tax Firms of David W. Klasing can use their experience and familiarity with FBAR reporting guidelines to your situation so you can stay in compliance and avoid serious penalties.
Get the facts about FBAR penalties from tax law offices in David W. Klasing
You are right to worry about how failure to meet the complex FBAR reporting requirements can impact your financial situation. Make an appointment with one of the doubly certified tax lawyers and CPAs from the tax law offices of David W. Klasing today by calling (800) 681-1295.
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Public contact: Dave Klasing Esq. MS-Impôt CPA, [email protected]
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