Trusts and Estates Foreign Asset Reporting: FATCA, FBAR, Forms 3520, 5471, and 8865

Description

The government assesses and collects FBAR liability and penalties from beneficiaries and executors after a decedent's date of death and after assets are distributed. In United States v. Park, No. 16 C 10787 (N.D. Ill. May. 24, 2019), for example, the penalty assessed was over $3.5 million. Executors and tax professionals must include determining a taxpayer's compliance with foreign reporting obligations as a necessary step when reviewing, settling, or reporting a decedent's estate.

The penalty for non-willful FBAR violations is $10,000; this can be waived for reasonable cause. Willful non-filing, however, can result in penalties of $100,000 or 50% of the account balance, whichever is larger, as assessed in U.S. v. Park. Advisers must be able to identify and distinguish between a potentially willful or non-willful violation to accurately advise clients.

Form 1040, Schedule B, asks: "During 2019, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If 'Yes,' you may have to file Form 3520. See instructions."

In addition to the FBAR, Form 3520 must be filed when a person receives a gift, inheritance, or distribution from a trust established by a foreign entity or individual. In addition to the 3520, owners of foreign trusts must file Forms 8938 and the FBAR. The trust itself must annually file for 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Parts II and III of the form require reporting a complete set of books for the entity, an income statement, and balance sheet.

Listen as our panel of experts discusses identifying trusts and estates with foreign reporting obligations, reviews the current government initiative to assess penalties, explains the completion of required forms, and outlines best practices for bringing taxpayers into compliance.