May 25, 2010 - Phil Hodgen

New foreign trust tax rules, Part 8 – bigger penalties

This is the final episode of my leisurely tour through the new foreign trust tax rules.  In case you missed one of the earlier episodes, find them here:  Part 1 – OverviewPart 2 – Using Trust Property For FreePart 3 – expanding the grantor trust rulesPart 4 – new presumptions for discretionary trustsPart 5 – Letters of Wishes are uselessPart 6 – all foreign trusts have U.S. beneficiaries, Part 7 – more paperwork.

In a completely different context, a Wise Old Man* once told me, “Your BEST ideas plus ALL of your BEST efforts have yielded this utter failure.”  Actually, it is a mathematical formula:  best ideas + best efforts = failure. Then he followed up with a question to me:  “And you want to put MORE effort and energy into that? And somehow things are going to change from failure to success?”

In other words, adding more of the same will not yield different results.

This, apparently, is something not understood at all by Congress, the Department of Treasury, and the IRS (I’m looking at a very specific Deputy Commissioner of the Internal Revenue Service when I say this).

But I digress.


The current reality

U.S. tax law abounds with requirements for filing pieces of paper reporting this event or that event.  Penalties are staggering.

The new reality

Mo’ staggering.  There is now a $10,000 minimum penalty where it didn’t exist before.

The HIRE Act language

Here is what the new law says about penalties:


(a) In General – Subsection (a) of section 6677 is amended—

(1) by inserting ‘the greater of $10,000 or’ before ‘35 percent’ , and

(2) by striking the last sentence and inserting the following:

‘At such time as the gross reportable amount with respect to any failure can be determined by the Secretary, any subsequent penalty imposed under this subsection with respect to such failure shall be reduced as necessary to assure that the aggregate amount of such penalties do not exceed the gross reportable amount (and to the extent that such aggregate amount already exceeds the gross reportable amount the Secretary shall refund such excess to the taxpayer).’

(b) Effective Date – The amendments made by this section shall apply to notices and returns required to be filed after December 31, 2009.

What it means

Don’t f*** up.


* I have been fortunate to have wise people around me for much of my life.  Lucky for me, sometimes I actually hear what they say.

Tax and Trusts