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I.R.S. Reporting Forms for U.S. Taxpayers with Offshore Trusts / Companies / Assets / Financial Accounts  
Implementing "Bullet Proof" Asset Protection requires forming an International Asset Protection Trust and usually also requires adding a Nevis Offshore LLC. We have packaged these services to make it easy to form these entities, but there is a price: The I.R.S. has developed very complicated reporting of these offshore structures as well as offshore accounts and assets. The law provides for severe penalties for non-reporting and/or non-payment of the due tax on your offshore income or offshore income attributable to you directly or indirectly.

Offshore tax reporting has gotten complicated, but with the right help, it is really no more complicated than preparing a complex tax return for a U.S. corporation! The problem is that there are many corporate service providers, both offshore and onshore, that "hard sell" offshore entities to a client without any disclosure whatsoever of these reporting requirements.

We feel that the marketing of offshore entities to U.S. Persons without full disclosures of their tax reporting requirements is grossly unethical. In fact a simple disclosure is just not enough for us:  Not only will we advise and inform you of these I.R.S. Reporting Requirements prior to processing your order, but once you become a client, we will provide you with "cliff notes" to provide to your accountant and issue reminder notices in advance of the filing deadlines of the various forms.

 
Form 3520 - Transactions with Foreign Trusts  
I.R.S. defined purpose of form: U.S. persons must file Form 3520 to report certain transactions with foreign trusts, ownership of foreign trusts under the rules of sections 671 through 679, and receipt of certain large gifts or bequests from certain foreign persons.

Filing deadline: In general, Form 3520 is due on the date that your income tax return is due, including extensions. Form 3520 must have all required attachments to be considered complete. Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Penalty for Non-Compliance: Equal to the greater of $10,000 or: 35% of the gross value of any property transferred to a foreign trust or 35% of the gross value of the distributions received from a foreign trust or 5% of the gross value of the portion of the trust's assets.

Explanation: A U.S. Person considered an "owner" of a foreign trust must file form 3520 every year. Part I must be completed in a year a transfer of property to a foreign trust occurred. This could simply be a transfer or a completed gift. Part II must be completed every year disclosing your foreign ownership. Here is also the requirement to attach form 3520-A if this form is not filed by the foreign trustee, as is often the case. The form is also used to report a distribution or a loan that was received by a U.S. Person from a foreign trust. The return is an "informational return" and no tax is paid with the return. If a transfer was a completed gift in excess of the allowed limits, you may also have to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

Download Form 3520

 
Form 3520a - Annual Info Return of Foreign Trust  
I.R.S. defined purpose of form: Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, and any U.S. person who is treated as an owner of any portion of the foreign trust.

Filing deadline: File a complete Form 3520-A (including statements) by the 15th day of the 3rd month after the end of the trust's tax year (Generally March 15th). Give copies of the Foreign Grantor Trust Owner Statement (page 3 of Form 3520-A) and the Foreign Grantor Trust Beneficiary Statement (page 4 of Form 3520-A) to the U.S. owners and any U.S. beneficiaries by the same deadline. Note: An extension of time to file an income tax return (1040) will not provide an extension of time to file Form 3520-A. Form 7004 must be filed in order to request an extension of time to file. Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
NOTE: This requirement is placed upon the Foreign Trustee, HOWEVER, in most cases foreign trustees decline to file as the U.S. has no jurisdiction over them to force compliance. In this case the U.S. person will need to prepare and file form 3520-A along with form 3520 (described above) which is due with the U.S. Persons personal 1040.

Penalty for Non-Compliance: Equal to the greater of $10,000 or 5% of the gross value of the trust's assets at the close of the tax year. Technically it is the Trustee that is required to file, but since few Offshore Trustees actually comply, the I.R.S. asses a penalty against the U.S. owner for non-compliance.

Explanation: A foreign trust with a U.S. owner must file form Form 3520-A annually to report all income from U.S. and non-U.S. sources as well as any distributions to U.S. owners and beneficiaries. It includes a balance sheet and the total amount of trust income accumulated and not distributed. The return is an "informational return" and no tax is paid with the return. An included statement of "Foreign Trust Income Attributable to U.S. Owner" effectively acts like a "K-1" (used for partnerships and S-Corporations) and transfers the trust income to the tax return of the U.S. owner. In most cases the owner will report any income on their 1040.

Download Form 3520a

 
Form 8858 - Foreign Disregarded Entity (FDE)  
I.R.S. defined purpose of form: Form 8858 is used by certain U.S. persons that own an FDE directly or, in certain circumstances, indirectly or constructively. The form and schedules are used to satisfy the reporting requirements of sections 6011, 6012, 6031, and 6038, and related regulations.

Filing deadline: Form 8858 is due when your income tax return or information return is due, including extensions. If you are the tax owner of the FDE, attach Form 8858 and the separate Schedule M (Form 8858), if required, to your income tax return or information return. If you are not the tax owner of the FDE, attach Form 8858 to any Form 5471 or Form 8865 you are filing with respect to the CFC or the CFP that is the tax owner of the FDE.

Penalty for Non-Compliance: A $10,000 penalty is imposed for each annual accounting period of each CFC or CFP for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per CFC or CFP) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure. Criminal penalties under sections 7203, 7206, and 7207 may also apply for failure to file the information required by section 6038.

Explanation: An FDE is an entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes under Regulations sections 301.7701-2 and 301.7701-3. A U.S. Person that is a "Tax Owner" of a Foreign Disregarded Entity" must file form Form 8858 annually to report all income from U.S. and non-U.S. sources. It includes a balance sheet. For the most part this is a very simple return that allows a U.S. Person to operate a Foreign Corporation or LLC with this minimal U.S. Tax reporting requirement. The return is an "informational return" and no tax is paid with the return. In most cases the owner will report any income on their 1040 and form 8858 will simply be attached and filed along with the 1040. However if a Controlled Foreign Corporation (CFC) or Controlled Foreign Partnership (CFP) is the owner, form 8858 will be included with the CFC or CFP tax return. The draconian penalties can be explained because the I.R.S. introduced this form to discover the many (FDE) subsidiaries owned by Fortune 500 controlled CFC's.

Download Form 8858

 
Form 8938 - Statement of Foreign Financial Assets  
I.R.S. defined purpose of form: Form 8938 is used to report the "specified foreign financial assets" of a U.S. Person if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. You must report the specified foreign financial assets in which you have an interest even if none of the assets affects your tax liability for the year. If you live in the United States and are unmarried, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. If you live outside of the United States, the reporting thresholds start at $200,000 for single and $400,000 for joint tax returns.

Filing deadline: Form 8938 is due when your income tax return (form 1040) is due, including extensions. Attach Form 8938 to your annual return.

Penalty for Non-Compliance: If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000. If you do not file a correct and complete Form8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000. n addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.

Explanation: "Specified foreign financial assets" generally include "custodial accounts" which are Bank or Brokerage Accounts as well as "other foreign assets" which include stock/membership in foreign organizations, foreign notes, precious metals custodial accounts etc. Foreign Real Estate is not currently reportable, nor are Gold or Silver Bullion stored overseas (as long as it meets certain requirements so it does not become a "custodial" account). However, if you own Real Estate or Gold/Silver within a foreign corporation, the stock of the foreign corporation would be reportable.

For the most part form 8938 is a simple informational return that is required to be filed along with your 1040 if you meet certain reporting thresholds.There are reporting exemptions if you have already listed assets on Foreign Trust reporting forms 3520 and 3520-A for the same tax year. The return is an "informational return" and no tax is paid with the return. In most cases the owner will report any income generated from the assets listed on their 1040 and form 8838 will simply be attached and filed along with the 1040.

Download Form 8938

 
FBAR/FinCEN Form 114 - Foreign Financial Accounts  
I.R.S. defined purpose of form: If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). United States persons are required to file an FBAR if: the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Filing deadline: The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return. A filing extension, granted by the IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.

Penalty for Non-Compliance: A person required to file an FBAR who fails to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation (per account/per year NOT per FBAR) for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation (per account/per year NOT per FBAR). For guidance when circumstances such as natural disasters prevent the timely filing of an FBAR, see FinCEN guidance, FIN-2013-G002 (June 24, 2013).

Explanation: Formerly Form TD F 90-22.1: For the most part this is a simple informational return that is required to be filed annually, however the penalties for failure to file this form timely are draconian. Civil penalties for even nonwillfull failure to file are $10,000 and are assessed per account and per year, not per FBAR. So if a U.S. Person failed to disclose 5 accounts over 3 years, the penalty may be as high as $150,000. Note that the FBAR (or FinCEN form 114) is NOT filed with the I.R.S., instead (since July 2013) it must be filed electronically through FinCEN’s BSA E-Filing System. The new FinCEN Form 114a, Record of Authorization to Electronically File FBARs, is not submitted with the filing but, instead, is maintained with the FBAR records by the filer and the account owner, and made available to FinCEN or IRS on request.

Download Form FBAR/FinCEN 114
Download Instructions for FBAR/FinCEN 114

File FBAR/FinCEN 114 Online

 
Form 926 - Transfer of Property to Foreign Corporation  
I.R.S. defined purpose of form: Use Form 926 to report certain transfers of tangible or intangible property to a foreign corporation required by section 6038B

Filing deadline: In general, form 926 must be filed with the U.S. transferor's income tax return for the tax year that includes the date of the transfer.

Penalty for Non-Compliance: If a taxpayer fails to comply with section 6038B, the penalty equals 10% of the fair market value of the property at the time of the transfer. The penalty will not apply if the failure to comply is due to reasonable cause and not to willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided.

Explanation: A U.S. person that transfers cash to a foreign corporation must report the transfer on Form 926 if (a) immediately after the transfer the person holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation or (b) the amountof cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,000. See Regulations section 1.6038B-1(b)(3). The return is an "informational return" and no tax is paid with the return. The return is filed as a schedule to the transferors tax return.

Download Form 926

 
Form 5471 - Foreign Controlled Corporation  
I.R.S. defined purpose of form: Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations (Controlled Foreign Corporations). The form and schedules are used to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.

Filing deadline: Attach Form 5471 to your income tax return and file both by the due date (including extensions) for that return.

Penalty for Non-Compliance: Failure to file information required by section 6038(a) (Form 5471 and Schedule M). A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure. Failure to file information required by section 6046 and the related regulations (Form 5471 and Schedule O). Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000. Criminal penalties. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.

Explanation: If you elect to treat your foreign company as a corporation for U.S. tax purposes, then each year you will need to file form 5471. Under limited circumstances, a U.S. person can be a shareholder of a foreign corporation who is not required to pay U.S. income taxes on the income of the corporation until that income is distributed to the U.S. owners as a dividend (or possibly as a salary). The U.S. has no taxing authority over a foreign corporation with no U.S. source income and no permanent establishment in the U.S. However, the U.S. tax laws do have taxing authority over U.S. shareholders of foreign corporations. Income from a trade or business conducted entirely outside the U.S. is not subpart F income unless a "related" party is involved. Such non subpart F income and the profits (if any) are tax-deferred to the U.S. shareholders until they are distributed as dividends.This area of taxation is extremely complex. The form is essentially a corporate tax return, listing assets, income expenses, etc.  The return is very complex and it can be difficult to even determine who has to file and which schedules need to be included: There are 4 categories of filers and 12 schedules that may need to be attached. The return is an "informational return" and no tax is paid with the return. Generally form 5471 will be attached to the U.S. persons' 1040 and needs to be filed by the due date (including extensions) for that return.

Download Form 5471

Download Form 5471 Instructions

 

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