Form 3520-A filing deadline is March 15, 2011

For those of you who must file Form 3520-A, a quick heads-up.  Your filing deadline is almost certainly going to be March 15, 2011.

There are two things that must exist for Form 3520-A to be required:

• A foreign trust; and
• A U.S. “owner” of the foreign trust.

Neither of these items is necessarily intuitively obvious.

Drastic penalties are incurred for being late.  I will leave the editorial comments for another day.

Target Number 1:  Fideicomiso

Typical scenario where this form is required and the innocent American taxpayer has no ****-ing clue:

Schoolteacher saves for years.  Retires.  Buys a condominium in Baja California.  The condominium is owned through a Mexican trust called a “fideicomiso” because the Mexican constitution says that foreigners aren’t allowed to own real estate too close to the coastline.

This is a “foreign trust” and you have filing requirements with the IRS.  Form 3520-A is one of them.

Target Number 2:  foreign IRA-like accounts

Typical scenario #2 where this form is required and the innocent American taxpayer has no ****-ing clue:

U.K. citizen sticks money into an ISA for years and years.  Immigrates to the United States. Guess what? That ISA is a “foreign trust” and Form 3520-A (and perhaps other things) will be required in the USA for tax purposes.

Australian citizen sticks money into a superannuation account. Immigrates to the United States. Same result: Form 3520-A and maybe other stuff will be required.

For those of you who aren’t from the U.K. or Australia, these accounts are just like the U.S. Individual Retirement Account.

Canadians have a similar type of account called an RRSP. Fortunately for them, there is a specific ruling by the IRS that says “You don’t have to file the foreign trust paperwork for your RRSP.”  There is no equivalent specific ruling for ISAs or superannuation accounts or other similar types of accounts from other countries.

Memo to all personnel

What you think is not a trust? It might be a trust.

What you think is a trust but is not a foreign trust? It might be foreign.

Our IRS Commissioner sees himself as the Chief Debt Collector for the United States government.  A correspondent of mine reports on a meeting in Washington, DC with Mr. Shulman in which the following exchange occurred:

When it was stated to Schulman that FATCA would be a hindrance to exports, his answer was that he was only responsible for collecting revenue, not for other issues.

Oooookay.

Reader comments (15)

• Jan says Mar 14, 2011 2:30 pm

  Phil — this piece of information was very helpful. I’m a dual citizen and I have a retirement account in (another country) and I have filed FBARs for it religiously. However, I did not report any income on this, because I could not withdraw from it for a few years more.

  Are you saying that all foreign IRA like retirement accounts are considered trusts ? Or does it depend on how its set up — and requires a ruling from the IRS ?

  Either way, it looks like I have to file amended returns OR file a lot of trust forms (and I did take a look and those are very complicated). At least I’ve been filing FBARs, so my penalties would be restricted to income + interest + 20% at worst.

• Phil says Mar 14, 2011 2:56 pm

  All foreign IRA-like retirement accounts face the following problems when they touch an American:

  • They lose their tax-exempt status, so unless you can find a way around this (e.g., use a tax treaty) the retirement account will be treated as a taxable investment account by the IRS.
  • They are foreign trusts, so unless you can find a way around this (and I know of only one such situation–RRSPs for Canadians), you have to file Form 3520 and Form 3520-A.
  • They are foreign financial accounts, so you have to file Form TD F 90-22.1. And next year you will have to file the upcoming Form 8938.

  Earlier today I had a conversation with an Australian tax advisor (Hi, Peter!) about this very topic. Australians with superannuation accounts are screwed. Depending on where you are from, Jan, you may or may not be screwed as well. (Hint: if you’re not in Canada, you’re screwed.)

  The reason these foreign IRA-like retirement accounts are treated as trusts is just the nature of the beast — assets are being held by a third party (a “trustee” but in pension-talk this is an administrator or custodian) for your benefit when you retire. When you look at the definition of a trust in the Internal Revenue Code, this is it.

  What to do about this? Jeez. I wish I knew. The Secretary of the Treasury could give a flying doughnut about your problems. The best I can suggest (and I talked about this with Peter the Australian tax advisor) is to start making noise on your side of the pond. With your politicians. And hope that this raises the dialogue between your diplomats and the people in Washington DC. Eventually, if you’re lucky, something might happen.

  Alternately, get the pension plan administrators in your country to wake up. They’ll realize they have reporting requirements to the U.S. government. After all, they have money in an account that belongs to an American citizen. It isn’t being reported to the U.S. government. That is prima facie proof of Evil. What’s the difference between that pension plan administrator and a random Swiss bank? Answer: not too much. A friendly Department of Justice career bureaucrat might decide it’s fun to play rough. If the pension plan administrators (banks, usually) wake up, they will do something in self-preservation. But that’s a long-term solution.

  Remember to vote in the next election.

  /Phil

• Bert says Mar 15, 2011 12:26 pm

  Phil,
  you say that IRA like retirement accounts are considered trusts.
  But are regular investment accounts trusts as well?
  For instance, a person has an investment (a MF) with a foreign bank. That investment or any interest/dividend paid is not tax free in that foreign country. There is also no restriction on amount to be invested or withdrawn (so, it is not IRA-like account).
  Does the above constitute a foreign trust?

• Phil says Mar 15, 2011 12:58 pm

  @Bert,

  No, a regular investment account is not a trust, for esoteric reasons having to do with legal definitions. (The bank where you opened the account is a custodian or argent or something like that, not a trustee, as a technical legal matter.) Clearly (whee, I’m excited!) I’ll have to do a post on the definition of “foreign trust.” Which is actually good because I’m doing a one-hour presentation on foreign trusts next month for the California Society of CPAs and their annual Trust and Estate Planning Conference.

  /Phil

• Marty Smith says Mar 25, 2011 5:38 pm

  What is the specific ruling by the IRS that says “You don’t have to file the foreign trust paperwork for your RRSP”? I thought that the letter from Sibert from the CA tax franchise board (2003-0040) says that CA residents have to pay tax on their RRSPs?

• Phil says Mar 25, 2011 8:41 pm

  @Marty – the IRS said that RRSPs are exempt from the Form 3520 and Form 3520A requirements in an administrative pronouncement. I will find it next week for you. At the moment I am in Flagstaff, AZ on a family vacation and don’t have a computer handy.

  This is an excellent opportunity for me to pimp my RRSP book. The manuscript is finished. I’m attaching an appendix full of every document you need to understand RRSPs from the perspective of the IRS. Keep watching. It will be an ebook for download.

  /Phil

• Phil says Mar 29, 2011 8:04 am

  @Marty – the specific place where the IRS said that Form 3520 and Form 3520-A do not apply is in Notice 2003-75, Section 3:

  The new simplified reporting regime, instituted under the authority of section 6001, provides the information needed for tax compliance purposes. Therefore, pursuant to section 6048(d)(4), no reporting will be required under section 6048 with respect to RRSPs and RRIFs that have beneficiaries or annuitants who are subject to the new simplified reporting regime. Accordingly, the associated penalties described in section 6677 do not apply to such RRSPs and RRIFs and their beneficiaries or annuitants. A beneficiary or annuitant of an RRSP or RRIF may, however, be subject to other penalties.

  The “new simplified reporting regime” is Form 8891. Thus, if Form 8891 applies to you, that’s the paperwork required.

  For California, it is a completely different story. California indeed says that RRSPs are fully taxable accounts, as you note in your comment.

• jes says Jun 22, 2011 12:52 pm

  I’m a USC in Canada, I’m still trying to get clarity on whether my employer-based Registered Pension Plan is a “trust” that requires that I file the 3520. When I call the IRS, all they understand is RRSPs (for the millionth time, it is not an RRSP/RRIF. It is like a 401K. Yes, Canada has other pension/retirement plans that are NOT RRSPs…). And I am NOT RECEIVING DISBURSEMENTS. Only putting money in…(mine and my employer’s contribution). Help, and thank you!

• Phil says Jun 22, 2011 4:45 pm

  @jes,

  Interesting question. A quickie look (this is not legal advice, and the answer would require actual lifting and toting and charging of fees) tells me that reporting may not be required. There is an exception for foreign stock bonus, pension, or profit-sharing trusts that would qualify to be an exempt pension plan under US law except for the fact that is operated under foreign law. In other words, the magic eight-ball says “Quite possibly you’re OK” but I’m running off to get a haircut and can’t look right now.

  The administrator of your plan should have the answer off the top of his head. You’d THINK, at least. Right?

  Phil

• Mike Natt says Jul 28, 2011 12:11 pm

  Hi Phil. Under current regulations does the IRS only tax the distributions from an Australian superannuation account or the investment earnings of the account (or both)? I am a U.S. citizen holding two superannuation accounts in Australia and have been given two different versions on this by two different tax lawyers and their accountants. If the answer is they tax only the investment earnings because they do not recognize them as retirement accounts like a 401K or IRA then would it not make sense to withdraw all of the funds (I am over 65 and retired) and put them into a conventional investment account in the U.S. and get out from under all of this superannuation and foreign account nonsense? Would appreciate your thoughts.

• Phil says Jul 28, 2011 1:29 pm

  @Mike,

  There are three things going on with your superannuation accounts:

  1. Are they “foreign trusts” (or not) as far as the IRS is concerned? (Probably yes; indicates Form 3520 and Form 3520-A are required).

  2. Are they pension plans as far as the IRS is concerned (thus the income earned inside of them not taxable until distribution)? Or not? (Depends on the application of the US/Australia income tax treaty; if yes then Form 8833 required.)

  3. Are they “foreign financial accounts” as far as Form TD F 90-22.1 is concerned? (Absolutely yes. Stick them on your Form TD F 90-22.1.)

  I’m not going to tell you what to do because, well, I don’t know the particulars of your situation and I don’t want to give legal advice over the internet in a comment thread. But those are the three things you have to take care of.

  /Phil

• Mike Natt says Jul 31, 2011 1:14 pm

  Hi Phil,

  Thanks for the information. I will discuss it with my lawyer and the accountants. It is a really confusing situation.

  Mike

• Tom says Aug 9, 2011 12:14 am

  Phil,

  Do employer administered retirement plans have 3520 filing requirements. I used to work in India and they have some thing called a Provident Fund which is administered by a trust that is created by the employer.

  Just wondering if this 3520 nonsense applies only to “Individual” retirement accounts or does it also apply to employer administered retirement accounts.

• Lisa says Aug 23, 2012 3:05 pm

  What if you live in civil law country where trusts do not exist? Would a foreign personal invididual pension be treated as a trust? in my country, it is a bank account with savings for retirement. How do you know when it is set up as a trust? I am responsible for this account. I own it so how can it be a trust. To me it is the same as a savings account except I cannot take it out until I retire. Please help.

  Lisa

• Phil Hodgen says Aug 23, 2012 6:26 pm

  I’d have to know which country.

  The first problem is the interest earned on the retirement savings account. Does Uncle Sam think it is taxable now? Your home country may say it is not currently taxable (and will tax the interest when you withdraw it on retirement). Uncle Sam doesn’t care. He will think it is taxable, probably.

  The second problem is whether the account is a foreign trust or not. If you give the money to an institution to hold on your behalf in a role more convoluted than a simple bank account, this might be true. The fact that your home country doesn’t have trusts does not matter. Uncle Sam sees trusts everywhere.

  Don’t forget FBARs and Form 8938.

  Short answer: if this is a government-created, tax deferred retirement plan you might have a problem with your Uncle.