u.s. tax reporting of foreign retirement accounts and...

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U.S. Tax Reporting of Foreign Retirement Accounts and

Other Foreign Trusts

THURSDAY, JANUARY 23, 2020, 1:00-2:50 pm Eastern

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January 23, 2020

U.S. Tax Reporting of Foreign Retirement Accounts and Other Foreign Trusts

Stephen J. Dunn, Founder

Dunn Counsel

[email protected]

Usman Mohammad, Of Counsel

Kostelanetz & Fink

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

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MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Tax Reporting of Foreign Retirement Accounts and Other Foreign Trusts

Stephen J. DunnDUNN COUNEL PLC900 Wilshire Drive, Suite 110Troy, MI 48084Tel. (248) 643-8130Email [email protected]

Mr. Dunn has practiced law for 35 years. Most of his practice involves helping Americans comply with the Internal Revenue Code and Bank Secrecy Act concerning foreign accounts, income, and entities. He also practices tax controversies generally and estate planning. He is admitted to practice before courts of the State of Michigan and many Federal courts. He blogs at personalfinancialcounsel.com and has published a treatise, Foreign Accounts Compliance. He has a Martindale-Hubbell peer review rating of AV (preeminent) and an Avvo rating of 10 (highest).

Mr. Dunn earned his B.S.B.A. cum laude from Aquinas College. He earned his J.D. from Notre Dame Law School, andwas an Associate Editor of the Notre Dame Law Review. Before law school he was an auditor with Ernst & Young and earned the Michigan Certified Public Accountant designation. He is a currently-licensed Michigan CPA.

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http://www.personalfinancialcounsel.com/

Usman Mohammad is Of Counsel at Kostelanetz & Fink, LLP. Mr. Mohammad joined the firm in 2000. His practice areas include tax controversies, commercial litigation, and state and federal criminal litigation. Mr. Mohammad received his B.A. from the University of North Carolina at Chapel Hill in 1995, and graduated cum laude and Order of the Coif (top 10 percent) from the University of Michigan Law School in 1998, where Mr. Mohammad was an Executive Editor of the Michigan Law Review.

Usman Mohammad

Kostelanetz & Fink, LLP

7 World Trade Center

New York, New York 10007

212-808-8100

212-808-8108

[email protected]

https://www.kflaw.com

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https://www.kflaw.com/

Different Types of Retirement Plans (UM)

1. Employer Created Defined Benefit Plans

2. Employer Created Defined Contribution Plans

3. Personal Retirement Plan

4. Government Sponsored Retirement Plan

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1. Employer Created Defined Benefit Plans (UM)

A. Characteristics:

• Employer creates the plan and is responsible for administering the plan

• A defined benefit retirement plan provides a benefit to employee based on a fixed formula

• Results in fixed periodic payments to employee when they retire

• Employee typically does not fork over any of their paycheck to participate in a defined benefit plan

• Payments to employee are not based on performance of underlying investments of monies used by employer to fund the plan

• Employer has risk/reward for underlying investments

• If underlying investments outperform the employer’s obligation to pay benefits under the plan, then the employer keeps the excess

• But if underlying investments underperform, then employer is still liable for paying the defined benefit retirement payments to the employee

• Employees have little control over the funds until they are received in retirement in the form of periodic payments

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1. Employer Created Defined Benefit Plans, Cont.(UM)

B. Examples of Employer Created Defined Benefit Plans in U.S.

• Traditional pension plan

• Higher risk for employers

• There has been a shift away from employer created defined benefit plans and towards employer created defined contribution plans in the U.S.

C. What to Keep in Mind for Purposes of FBAR, Form 8938, Form 3520, etc.

• There is no segregated account for the separate employees

• Employees have no say in how funds are invested

• Employees are not making transfers from their wages into the plan

• Only right the employee has is to receive certain fixed periodic payments upon retirement

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2. Employer Created Defined Contribution Plans (UM)

A. Characteristics:

• Created by employer, but often administered by a third party administrator

• Segregated accounts that are separated by employee

• Segregated accounts are funded by contributions made by the employee or employer or both

• Each segregated account has an account balance that reflects the contributions to the plan earmarked for that particular employee

• Employees receive statements providing updated account balance and performance of underlying investments

• Employee will typically be able to choose the investments that the contributions to her segregated retirement account are placed into

• Future retirement benefits to the employee are based on value of their segregated retirement account

• Value of the segregated retirement account is based on contributions made by the employee and/or employer to the account, plus any growth in value of the account based on investments

• Employee carries the risk/reward for any increase in value in the investments in the defined contribution plan

• The employer has no obligation toward the account’s performance after the funds are deposited (so low risk to employer)

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2. Employer Created Defined Contribution Plans, Cont. (UM)

B. Examples of Employer Created Defined Contribution Plans in U.S.

• 401(k) - Funded by contributions by employee (and possibly an employer match). Employee will have their own segregated 401(k) account. Value of 401(k) account is based on the employee’s contributions, plus any employer match, plus any increase in value in the account.

• Profit sharing plans - A profit-sharing plan accepts discretionary employer contributions. This money goes into a separate account for each employee.

• Simplified Employee Pension (SEP) plans - Money is contributed by employer only to SEP-IRA accounts for each employee. Employees can then choose how the money in their SEP-IRA accounts are invested.


• Segregated accounts that are separated by employee

• The employee can directing contributions from her wages to the account

• Employee typically selects the investments in the account

• Employee receives periodic statements providing updated account balance and performance of underlying investments, so employee will be in better position to know the value of her segregated account

• Employee has a great deal of control over the account. Employee may be able to take loans from the account even before retirement.

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3. Personal Retirement Plan (UM)

A. Characteristics

• Created by individual

• Individual can be working for employer, but individual creates and funds the plan outside of employment context

• Individual can be self-employed, and creates and funds a retirement plan directly tied to their self-employment

B. Examples of Personal Retirement Plan in U.S.

• Roth IRA & IRA

• Annuity contract


• Created by individual, so there will likely be an account of some sort for that individual

• All transfers into that plan are made by the individual

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4. Government Sponsored Retirement Plan (UM)

A. Characteristics

• Created by government

• Can come in many different varieties, including a pension funded entirely by the government based on a formula, or a retirement plan that depends on contributions by individual participants

• There may or may not be a designated retirement account for the individual

B. Examples of Personal Retirement Plan in U.S.

• Social security


• Different rules will apply to the government retirement plan depending on the nature of the plan, whether there is a segregated account for the plan, who contributes to the plan, etc.

• You may need to look at specific rules for the foreign information reporting form at issue to see if there is a specific carve out for a particular foreign government retirement plan

• You may also need to research whether there are specific reports or forms that have to be filed for particular foreign retirement plans

• Example: Until 2014, U.S. persons with Canadian Registered Retirement Savings Plans (“RRSP”) had to file Form 8891, which is a “U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans”

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Foreign Retirement Plans May Be Subject to U.S. Information Return Reporting Requirements (UM)

• Foreigners Working in U.S.o Preexisting foreign retirement plans

o Contributions to foreign retirement account while working in U.S.

• U.S. Persons Working Abroado Foreign retirement plan with a foreign employer

o Government sponsored foreign retirement plan

• Foreigners Retiring in the U.S.o Preexisting foreign retirement plans

o Distributions from foreign retirement accounts

o Distributions from foreign pensions

• U.S. Persons Retiring Abroado Preexisting foreign retirement plans

o Distributions from foreign retirement accounts

o Distributions from foreign pensions

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U.S. persons are subject to--

• U.S. income tax on their worldwide income

• U.S. tax information reporting

• U.S. Bank Secrecy Act

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The definition of “U.S. person” is the same both the Internal Revenue Code and the Bank Secrecy Act.

The definition “U.S. resident” is the same both the Internal Revenue Code and the Bank Secrecy Act.

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“U.S. person” means—

1. a U.S. citizen;

2. a U.S. resident; or

3. a domestic corporation, partnership, estate, or trust.

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A “U.S. resident” means—

• a lawful permanent resident of the U.S. (“green card” holder); or

• an individual who satisfies the substantial presence test.

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An individual meets the substantial presence test for a calendar year if:

(i) such individual was present in the United States on at least 31 days during the calendar year, and

(ii) the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days:

In the case of days in: The applicable multiplier is:Current year ........................................................ 11st preceding year ............................................. 1/32nd preceding year .............................................1/6

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Treas. Reg. § 301.7701(b)-1(e), E.g. (1)

B, an alien individual, is present in the United States for 122 days in the current year. He was present in the United States for 122 days in the first preceding calendar year and for 122 days in the second preceding calendar year. In determining his status for the current year, B counts all 122 days in the United States in the current year plus ⅓ of the 122 days in the United States in the first preceding calendar year (40⅔ days) and ⅙ of the 122 days in the United States during the second preceding calendar year (20⅓ days). The total of 122 + 40⅔ + 20⅓ equals 183 days. B meets the substantial presence test and is a resident alien for the current year.

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Treas. Reg. § 301.7701(b)-1(e), E.g. (2)

C, an alien individual, is present in the United States for 25 days during the current year. She was present in the United States for 365 days during the first preceding year and 365 days during the second preceding year. The substantial presence test does not apply because C is present in the United States for fewer than 31 days during the current year.

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Beneficial Ownership v. Financial Interest of Foreign Financial Account

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A person must have beneficial ownership of a foreign financial account to have an obligation to report the account, or income from the account for U.S. income tax purposes. But a person need only have financial interest in a foreign financial account to have an obligation to report the account on an FBAR. Beneficial ownership of a foreign financial account is a much narrower concept than financial interest in the account.

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Beneficial ownership of an account means whose money it really is in the account.

Beneficial ownership of an account is distinguished from legal title to an account. Legal title to an account means simple whose name is on the title to the account.

E.g., Nurrle v. Fitzgerald, 222 Mich. 327, 331, 192 N.W. 573, 575 (1923).

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Unless I have beneficial ownership of an account, I do not have any obligation to report the account for U.S. income tax purposes—I do not have an obligation to report income from the account on my U.S. income tax return, and I do not have an obligation to report the account on a U.S. information return.

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To have an obligation to report an foreign financial account on an FBAR, I need only have a financial interest in the account.

Financial interest in a foreign financial account means either beneficial ownership of the account or legal title to the account.

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FBAR (now known as FinCen Form 114) (UM)

1. Who Must File FBAR

2. Why Owners of Foreign Retirement Accounts May Need to File FBARs

3. What Is Reported On FBAR

4. When FBAR Is Due

5. Statute Of Limitations For FBAR

6. Penalties For Failure To File FBAR

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1. Who Must File FBAR (UM)

• Ownership interest, signature authority, or power of attorney over foreign bank account

• Foreign means outside the United States and outside United States territories

• Foreign financial account includes an account at a foreign branch of a United States bank

• Includes indirect interest through an entity (e.g., via a corporation), if taxpayer has a 50% or greater interest in the entity that owns the foreign bank account

• Aggregate interest in all foreign bank accounts exceeds $10,000 for the tax year

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2. Why Owners of Foreign Retirement Accounts May Need to File FBARs (UM)

• Foreign retirement account that is segregated by employee, bears an account number, generates regular periodic statements showing account value

• This will typically apply to employer-created defined contribution plans and their foreign analogs

• Will likely apply to personal pension plan created by individual, because there will likely be some form of segregated foreign account for that individual

• FBAR obligation typically does NOT apply to foreign employer-created defined benefit plan, such as a foreign pension plan, because there is no segregated foreign account for the employee

• There is only the right to receive certain defined payments upon retirement based upon a formula.

• FBAR obligation will apply to a number of foreign government sponsored retirement plans

• An “IRS FBAR Reference Guide” available on the IRS’s website expressly states that RRSPs as well as similar foreign retirement accounts such as “Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE)” are “foreign financial accounts reportable on the FBAR”

• Foreign social security or foreign government retirement plan that does not have associated segregated retirement account will not qualify for FBAR

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3. What Is Reported On FBAR (UM)

• Name of each bank at which foreign accounts are located

• Address of each bank at which foreign accounts are located

• High balance of each foreign account for the year

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4. When FBAR Is Due (UM)

• April 15 of year after the tax year at issue

• Filed electronically with FinCen (Financial Crimes Enforcement Network)

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5. Statute Of Limitations For FBAR (UM)

• 6 years from the due date of the FBAR report

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6. Penalties For Failure To File FBAR (UM)

• $10,000 for each non-willful violation.

• For willful violation, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation

• Separate violation for each year you did not file or filed materially incorrect FBAR

• For truly egregious violations, there may be criminal sanctions

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The classic willfulness profile is a U.S. person who transfers money abroad, ideally to a jurisdiction with bank secrecy laws, and invests it there, deliberately failing to report income from the foreign investments on such person’s U.S. income tax returns. This is increasingly unlikely in the FATCA era.

There are people who transferred funds overseas pre-FATCA, and who remain noncompliant with U.S. laws with respect to those assets. These people need to become compliant as soon as possible.

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There is no FBAR penalty if--

1. the violation was due to reasonable cause; and

2. the amount of the transaction or the balance in the account at the time of the transaction was properly reported. What does this mean?

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Information Reporting Under the U.S. Internal Revenue Code

• Form 8938 • Form 926

• From 5471 • Form 3520

• Form 8865 • Form 3520-A

• Form 5472 • Form 8621

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IRC § 6501(c)(8)(B)

In the case of any information which is required to be reported tothe Secretary pursuant to an election under section 1295(b) orunder section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A,or 6048, the time for assessment of any tax imposed by this title(Title 26, U.S. Code) with respect to any tax return, event, orperiod to which such information relates shall not expire beforethe date which is 3 years after the date on which the Secretary isfurnished the information required to be reported under suchsection.

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Form 8938 (Statement of Specified Foreign Financial Assets) (UM)

1. Who Must File Form 8938

2. Why Owners of Foreign Retirement Plans May Need to File Form 8938

3. When Form 8938 Is Due

4. Statute Of Limitations For Form 8938

5. Penalties Related to Form 8938

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1. Who Must File Form 8938 (UM)

• Direct ownership interest in “specified foreign assets”

• Specified foreign asset includes:

• foreign account located in a foreign financial institution

• (May differ from FBAR definition)

• interest in a foreign entity

• stock or security issued by a foreign person

• any financial instrument or contract held for investment that has a foreign issuer or foreign counterparty

• Value of specified foreign assets exceeds certain thresholds

• Lowest threshold is $50,000 on last day of tax year for unmarried U.S. citizen residing in the U.S.

• Highest threshold is $600,000 at any time during the tax year for married U.S. citizen residing outside the U.S. and filing joint returns

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2. Why Owners of Foreign Retirement Plans May Need to File Form 8938 (UM)

Foreign Retirement Account

• Foreign account - even a retirement account - qualifies as a specified foreign asset that must be reported on Form 8938

• Foreign retirement account as a segregated account for particular employee, has specific account number, periodic statements showing account value

• Instructions for Form 8938 expressly provides that an interest in a foreign “deferred compensation plan” must be reported on Form 8938

• Foreign deferred compensation plan -- i.e., a foreign retirement account --must be reported in Part VI (“Detailed Information for Each Other Foreign Asset”) of Form 8938

• Valuing foreign retirement account for purposes of Form 8938

• Account statement should be used to report value of the account

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2. Why Owners of Foreign Retirement Plans May Need to File Form 8938, Cont. (UM)

Foreign Pension

• Unlike on FBAR, foreign pension will have to be reported on Form 8938, even though there is no specific account for the employee, and even though all the employee has is a right to certain defined payments upon retirement

• The contract giving the right to payment from the foreign pension is considered the specified foreign asset

• Instructions for Form 8938 expressly provide that an “interest in [a] foreign pension plan” must be reported on Form 8938

• Foreign pension plan must be reported in Part VI (“Detailed Information for Each Other Foreign Asset”) of Form 8938

• Valuing foreign pension for purposes of Form 8938:• The maximum value of your interest is the FMV of your beneficial interest in the

pension plan as of the last day of the tax year • If you do not know or have reason to know based on readily accessible information

the FMV, then you use the FMV of the cash and other property distributed during the tax year to you as a beneficiary or participant

• If you received no distributions during the tax year, and do not know or have reason to know the FMV of your interest, then use a value of zero as the maximum value of the asset

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2. Why Owners of Foreign Retirement Plans May Need to File Form 8938, Cont. (UM)

Foreign Social Security

• Per instructions to Form 8938, an interest in a social security, social insurance, or other similar program of a foreign government is not a specified foreign financial asset.

• Thus, foreign social security does not have to be reported on Form 8938

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3. When Form 8938 Is Due (UM)

• Form 8938 is attached to and made part of the individual’s Form 1040 income tax return

• So due date is the same as the due date for the individual’s income tax return

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4. Statute Of Limitations For Form 8938 (UM)

If no Form 8938 (or inaccurate Form 8938):

• IRS takes the position that there is no running statute of limitations

• What does this mean in practical terms?

If Form 8938 was filed with a tax return:

(i) ordinary 3 year statute of limitations;

(ii) 6 year statute of limitations based on certain understatements of income; or

(iii) no statute of limitation in egregious cases

If an amended return is filed, and the Form 8938 is amended or filed for the first time for that tax year, then:

(i) the normal rules with respect to statute of limitations for amended returns should apply;

(ii) The limitations period is not extended by the amended return

(iii) But IRS may use this as evidence against taxpayer

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5. Penalties Related to Form 8938 (UM)

1. Failure to File Form 8938. 26 U.S.C.A. § 6038D(d).

• $10,000 penalty for failure to timely file Form 8938

• Continuing failure to file: if the IRS mails notice of the failure to file, then after 90 days there is an additional penalty of $10,000 for each 30-day period during which the Form 8938 is not filed.

• The maximum continuing failure to file penalty is $50,000

2. Inaccurate Form 8938

• If the failure to disclose a specified foreign financial asset results in an underpayment of tax, then there is a 40% accuracy-related penalty on the underpayment. 26 U.S.C § 6662(j); see also 26 C.F.R. § 1.6038D–8 (Penalties for failure to disclose).

• Accuracy-related penalty for domestic assets is just 20%.

3. Civil Fraud Penalty in Connection with Form 8938.

• 75% civil penalty.

4. Criminal Penalties

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IRC § 6038D, requiring Form 8938, was first effective for tax years beginning after December 11, 2011.

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Form 3520

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There are several categories of Form 3520 filers.

Form 3520 must be filed by a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules of IRC §§ 671-679.

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Form 3520 must be filed by a U.S. person who, during the current tax year, received more than $100,000 from a nonresident alien individual or a foreign estate that the U.S. person recipient treated as gifts or bequests (rather than income).

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There are other categories of Form 3520 filers. See Form 3520 Instructions, at page 1.

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Form 3520 is a stand-alone tax return. It is due to be filed by the 15th day of the fourth month following close of the taxpayer’s tax year, unless one of the following exceptions applies:

• the taxpayer lives outside the U.S. and Puerto Rico, and the taxpayer’s place of business or post of duty is outside the United States and Puerto Rico; or

• the taxpayer is in the military or naval service on duty outside the U.S.,

in which case the taxpayer’s Form 3520 is due to be filed by the 15th day of the sixth month following close of the taxpayer’s tax year.

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Timely filing of Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, extends the taxpayer’s Form 1040, U.S. Individual Income Tax Return, and all information returns that are due with it, including Forms 3520, 5471, 8865, 8938, 8621, 5472, and 926.

But as we will see below, Form 4868 does not extend the taxpayer’s Form 3520-A. Form 3520-A is considered an information return of a foreign trust and not of the U.S. taxpayer. Form 3520-A has a different due date than Form 1040, and it is extended by a different form—Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

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The Form 3520 filing requirement applies to every U.S. person who, on or after October 16, 1962, creates a foreign trust or transfers money or property, directly or indirectly, to a foreign trust.

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If a U.S. person is treated as the owner of a foreign trust under the grantor trust rules, and fails to timely file Form 3520, or files Form 3520 with incomplete or incorrect information, such U.S. person is subject to assessment of a penalty. The amount of the penalty is the greater of $10,000 or 5% of the gross value of the foreign trust’s assets treated as owned by the U.S. person under the grantor trust rules.

The IRS may grant relief from the penalty where the failure to file was due to reasonable cause and not willful neglect.

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Form 3520-A

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Each U.S. person who is treated as an beneficial owner of any portion of a foreign trust under the grantor trust rules of IRC §§ 671-679 at any time during the tax year is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to the trust’s U.S. owners and U.S. beneficiaries.

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Exception. Custodians of Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a U.S. citizen or resident alien who holds an interest in an RRSP or RRIF.

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[Form 3520-A contents.]

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Form 3520-A is a separately-filed, stand-alone, tax return. A U.S. person required to file Form 3520-A must, by the 15th day of the third month following the end of the foreign trust’s tax year—

• file the Form 3520-A with the IRS; and

• provide copies of the Foreign Grantor Trust Owner Statement (pages 3 and 4 of the Form 3520-A) and the Foreign Grantor Trust Beneficiary Statement (page 5 of Form 3520-A) to the U.S. owners and U.S. beneficiaries of the foreign trust.

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Unlike Form 3520, Form 3520-A is extended not by filing Form 4868, but by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

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The Form 3520-A filing requirement is effective for tax years beginning after December 31, 1976.

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If a U.S. person is treated as the owner of a foreign trust under the grantor trust rules, and fails to timely file Form 3520-A, or files Form 3520-A with incomplete or incorrect information, such U.S. person is subject to assessment of a penalty. The amount of the penalty is the greater of $10,000 or 5% of the gross value of the foreign trust’s assets treated as owned by the U.S. person under the grantor trust rules.

The IRS may grant relief from the penalty where the failure to file was due to reasonable cause and not willful neglect.

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Form 8621

Used to report interests in foreign mutual funds (“personal foreign investment companies” of “PFICs”).

Filed with taxpayer’s U.S. income tax return.

Importantly, taxpayer need not file Form 8621 if the aggregate value of his PFIC interests in the tax year did not exceed $25,000. Treas. Reg. § 1.1298-1(c)(2)(i)(A)(1).

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Grantor Trust Rules

IRC § 671. Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual.

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IRC § 673(a) provides that the grantor is treated as the owner of any part of a trust over which he has a reversionary interest in principal or income. The “grantor” of a trust is someone who creates a trust, and transfers property to it. Transferring property to a trust is called “funding” the trust.

So, if I create a trust, and transfer property to it, retaining a right for the property to revert to me, then for Federal income tax purposes I own that property, and I realize the income, deductions, and credits with respect to it.

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IRC § 674(a) provides that the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition exercisable by the grantor.

So, if I create a trust, and transfer property to it, retaining the right to control beneficial enjoyment of the trust property, then for Federal income tax purposes I am treated as the owner of the trust property, and I realize the income, deductions, and credits with respect to that property.

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IRC § 675 provides that the grantor shall be treated as the owner of any portion of a trust in respect of which—

1. The grantor retains a power to purchase, exchange, or otherwise deal with or dispose of the corpus or income of the trust for less than an adequate consideration in money or money's worth (i.e., the right to self-deal in trust property).

2. The grantor retains the right to borrow the corpus or income without adequate interest or security.

3. The grantor has borrowed corpus or income, and has not repaid the loan in full by the beginning of the tax year.

4. The grantor retains one or more of the following “general powers of administration” exercisable in a nonfiduciary capacity (a) a power to vote or direct the voting of stock or other securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; (b) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; or (c) a power to reacquire the trust corpus by substituting other property of an equivalent value.

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IRC § 676 provides that the grantor shall be treated as the owner of any portion of a trust with respect to which the grantor holds the power to revoke revesting title to trust property in himself.

So, if a grantor creates a trust, and transfers property to it, retaining the power to revoke the trust revesting trust property in himself, then for Federal income tax purposes the grantor is deemed the owner of the trust property, realizing income, deductions, and credits with respect to trust property.

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IRC § 677(a) provides that the grantor shall be treated as the owner of any portion of a trust, the income of which may be—

1. distributed to the grantor or the grantor's spouse;

2. held or accumulated for future distribution to the grantor or the grantor's spouse; or

3. applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse (except policies of insurance irrevocably payable for a purpose specified in IRC §170(c) (relating to definition of charitable contributions)).

So, if a taxpayer creates a trust and transfers property, retaining the right to receive income from that property, then for U.S. income tax purposes he is deemed the owner of that property, and to realize the income, deductions, and credits with respect to that property.

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IRC § 678(a) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself.

This is fundamentally different from the other grantor trust provisions. If someone other than me creates a trust, and I have the current right to withdraw corpus or income from the trust, then for Federal income tax purposes I am treated as the owner of the trust property, and I realize income, deductions, and credits with respect to trust property.

In the other grantor trust provisions, the individual who established the trust is the one benefitting from it.

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IRC § 83(a) – Property Transferred in Connection with the Performance of Services

(a) General rule.

If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of-

(1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over

(2) the amount (if any) paid for such property,

shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable.

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IRC § 83(c) – Substantial Risk of Forfeiture

(c) For purposes of this section–

(1) Substantial risk of forfeiture.

The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.

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But see IRC § 911(a) and IRS Form 2555, Foreign Earned Income (foreign earned income exclusion).

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GAO Report (Jan 2018) on Foreign Retirement Accounts & Foreign Information Returns

• GAO recognizes that Form 8938 reporting requirement for foreign retirement accounts is onerous and expensive for persons with foreign pensions

• IRS has told GAO that IRS views foreign retirement accounts with suspicion

• IRS has told GAO that it is building a database based on Form 8938 reports that it receives

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Income Tax Treaties

See United States-United Kingdom Income tax Treaty of 2001.

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United States-United Kingdom Income Tax Treaty of 2001

Article 1, Par. 4

Notwithstanding any provision of this Convention except paragraph

5 of this Article, a Contracting State may tax its residents (as

determined under Article 4 (Residence)), and by reason of

citizenship may tax its citizens, as if this Convention had not come

into effect.

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Article 1, Par. 5(a)

5. The provisions of paragraph 4 of this Article shall not affect:

a) the benefits conferred by a Contracting State under . . .

paragraphs 3 and 5 of Article 17 (Pensions, Social Security,

Annuities, Alimony, and Child Support), paragraph 1 of Article

18 (Pension Schemes) . . . .

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ARTICLE 17

Pensions, Social Security, Annuities, Alimony, and Child Support

1. a) Pensions and other similar remuneration beneficially owned by a resident of a

Contracting State shall be taxable only in that State.

b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such

pension or remuneration paid from a pension scheme established in the other

Contracting State that would be exempt from taxation in that other State if the

beneficial owner were a resident thereof shall be exempt from taxation in the

first-mentioned State.

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Article 18

Pension Schemes

1. Where an individual who is a resident of a Contracting State is a

member or beneficiary of, or participant in, a pension scheme

established in the other Contracting State, income earned by the

pension scheme may be taxed as income of that individual only when,

and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social

Security, Annuities, Alimony, and Child Support) of this Convention, to

the extent that, it is paid to, or for the benefit of, that individual from

the pension scheme (and not transferred to another pension scheme).

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United Kingdom Self-Invested Pension Plans and

Individual Savings Accounts.

See Dunn, “U.S. Income Taxation of U.K. ISAs and SIPPs.”

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Issues in Analyzing U.S. Internal Revenue Code and Bank Secrecy Act Compliance of Foreign Trusts

1. Is U.S. person’s compensation deferred into foreign trust currently subject to U.S. income tax?

2. Is U.S. beneficiary of foreign trust currently subject to U.S. income tax on income generated by the trust?

3. Must U.S. beneficiary of foreign trust file Form 3520 or Form 3520-A with respect to his or her interest in the foreign trust?

4. Must U.S. beneficiary of foreign trust file Form 8621 with respect to his or her interest in the foreign trust?

5. Must U.S. beneficiary of foreign trust report financial accounts held in the trust on an FBAR?

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Case Study 1

Richard is a native-born citizen of the United Kingdom. He retired to Florida to be closer to his daughter and her children. He is a lawful permanent resident (“green card holder”) of the United States.

Richard owns interests in two United Kingdom companies, for which he performs services, for which they compensate him.

Richard also owns interests in United Kingdom self-invested pension plans (“SIPPs”) and individual savings accounts (“ISAs”). The SIPPs and ISAs own interests in foreign mutual funds and interest-bearing bank accounts.

Richard receives the United Kingdom equivalent of social security.

Advise Richard on compliance with the United States Internal Revenue Code and Bank Secrecy Act.

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Case Study 2

Robert and Ashley are native-born citizens of the United States. In 2010, they moved to the United Kingdom, and lived and worked there until 2019, when they moved back to the United States. While Robert and Ashley lived and worked in the United Kingdom, their U.K. employers established SIPPs for them and annually made contributions to the SIPPs. Robert and Ashley still have the SIPPs. They are invested in foreign mutual funds and interest-bearing bank accounts. Robert and Ashley are each 40 years of age. While Robert and Ashley lived and worked in the United Kingdom, they filed U.K. income tax returns and paid any tax due, but they did not file U.S. income tax returns or pay any U.S. income tax.

Advise Robert and Ashley on compliance with the United States Internal Revenue Code and Bank Secrecy Act.

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u.s. tax reporting of foreign retirement accounts and...

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