IRC 402(b) Foreign Pension Trust Account Taxation: Avoiding Form - - PowerPoint PPT Presentation

WHO TO CONTACT DURING THE LIVE EVENT

For Additional Registrations:

• Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)

For Assistance During the Live Program:

• On the web, use the chat box at the bottom left of the screen

If you get disconnected during the program, you can simply log in using your original instructions and PIN.

IMPORTANT INFORMATION FOR THE LIVE PROGRAM

This program is approved for 2 CPE credit hours. To earn credit you must:

• Participate in the program on your own computer connection (no sharing) – if you need to register

additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover.

• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.

IRC 402(b) Foreign Pension Trust Account Taxation: Avoiding Form 3520-A, Form 3520, Form 8938 and FBAR Penalties

TUESDAY , JANUARY 22, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

Tips for Optimal Quality

Sound Quality When listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, please e-mail sound@straffordpub.com immediately so we can address the problem.

FOR LIVE PROGRAM ONLY

JANUARY 22, 2019

IRC 402(b) Foreign Pension Trust Account Taxation

Robert V. Hanson, Esq., International Tax Attorney Parent & Parent, Wallingford, Conn. rvh@irsmedic.com Anthony E. Parent, Founding Partner Parent & Parent, Wallingford, Conn. aep@irsmedic.com Sean J. O’Connor , Supervising Tax Attorney Parent & Parent, Wallingford, Conn. sjo@irsmedic.com

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 OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT 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.

US taxation and reporting requirements of foreign retirement plans

Anthony E. Parent, Esq. Sean J. O’Connor, Esq. Robert Hanson, Esq.

5

Before focusing his full attention to tax law, Attorney Parent focused on criminal law

• appeals. He found great success, but also frustrations. He was only able to help

about eight clients a year. When he joined forces with his father, David G. Parent, Esq., the two realized that with a fully optimized tax practice, they could help a lot more people. Since 2006, Parent & Parent LLP has helped thousands of US taxpayers all around the globe handle difficult tax problems. In particular, Attorney Parent’s extensive criminal law background has been instrumental to the firm becoming one of the nation’s leading offshore disclosure firms. And while fixing problems is a source of great pride, helping their clients avoid future tax problems with solid planning and year-to-year compliance also offers incredible satisfaction. Attorney Parent developed the IRSMedic channel on YouTube which has close to two million minutes of watch time, writes extensively for the IRSMedic blog, and is a featured speaker at events around the country along with being a best-selling author

• f the “IRS Confidential.”

Attorney Parent volunteers as part of a pro-bono effort to represent servicemen and ex-servicemen who are facing daunting tax issues. Attorney Parent is a source for many international media outlets including the Wall Street Journal, SmartMoney, Fox News, CNBC, ExpatFocus, and others. Attorney Parent graduated Quinnipiac University School of Law in 2002 and is admitted to practice federal tax law with the IRS along with being a member of both the Connecticut and Vermont Bar associations. He married to his wife Erika.They have two sons, Ulysses and Ellis. He is a gym rat, and when conditions permit, a cyclist who enjoys both road and mountain, along with

• snowboarding. He is also a singer-songwriter who enjoys performing at least one a

month.

6

Anthony E. Parent, Esq.

Why is this topic so important?

• 7-9 million US expats living around the world
• 13.2 million US Green Card Holders
• 37 million legal immigrants

That’s about 50 million US persons who have an incredibly high chance of currently contributing to a foreign retirement plan or have one they no longer contribute to.

7

Why is this topic so important?

But what’s the level of compliance considering:

• 7.4 million individual tax returns filed a return with a Foreign

Tax Credit (2014)

• The IRS received less than 500,000 Form 2555 claiming Foreign

Earned Income Exclusion (2011).

• But this also includes taxpayers who also claimed the Foreign

Income Exclusion and the FTC or claim the FTC on Form 1116 and Schedule A (2015)

8

Why is this topic so important?

But what’s our level of compliance considering:

• In 2015, FinCEN received a record high 1,163,229 FBARs
• Less than 100,000 have used a disclosure program.

9

Why is this topic so important?

The Treasury Inspector General is all over this and the IRS agrees - th IRS is not examining these returns correctly and mistakes are quite common. But the budget is not there to increase exams. So this would be a good thing, right? In practice, while fewer examiners leads to fewer audits, yet for each audit a much more aggressive penalty regime, especially when it comes to foreign reporting, in order to maintain high deficiency assessments. Wouldn’t it make more sense for the IRS to penalize less, thus proving to Congress that they need a budget increase? All it is now is telegraphing the status quo of fewer and fewer revenue agents is just fine.

10

Legislative Updates

TTFI (Territorial Taxation for Individuals), TFFAAA (Tax Fairness for American Abroad Act), if either passed it will likely reduce the requirements of US person living overseas. But in order to exempt oneself, essentially a streamlined disclosure is required. A repeal of FATCA will only eliminate Form 8938 penalties. But what about Form 3520-A, Form 3520 and FBARs?

11

Course Outline

I. Information Reporting for Foreign Pensions and Trusts a. Classification of foreign pensions, annuities, and “social security” b. Forms 3520, 3520A, 8938, and FBAR II. Differentiation between foreign plans and “US Qualified Plans” III. Section 402(b) provisions and treatment IV. Grantor trust treatment V. Tax Treaty Applicability VI. Identifying and remedying misreporting a. Disclosure program options b. The reasonable cause standard

12

• I. Information Reporting for

Foreign Pensions and Trusts

Classification of foreign pensions, annuities, and “social security” It is important to understand the different types of retirement plans in the U.S. as these will need to be used as analogues when reviewing foreign plans. U.S. tax law has a tendency to force foreign items into pre-defined U.S. categories, which means that when we review foreign retirement plans we need to begin by looking for the U.S. analogue to the plan. If we know the US analogue however, it can help us figure out what forms need to be filed and how the retirement plan will be taxes.

13

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Benefit Plans

• Defined benefit plans are retirement plans characterized by

periodic payments upon retirement. Payments that are not based on the performance of the underlying investments of the funds ‘contributed’ to the plan. In the U.S. this has historically been the retirement plan of choice for governmental retirement plans (although government plans have largely been moving more toward a defined contribution model.)

14

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Benefit Plans

• The employer carries the risk/reward for investments associated with

these types of plans. If the underlying investments outperform the required payments, the employer will retain the difference. If the underlying investments underperform, the employer will still be responsible for satisfying the terms of the defined benefit plan. There is a guarantee that the benefits outlined by the plan will be delivered to the employee by the employer (Going out of business and sometimes even bankruptcy can relieve the employer of their

• bligations to these plans but there is a government run corporation,

Pension Benefit Guarantee Corporation, that protects private sector defined benefit plans.)

15

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Benefit Plans

• A literal description of this type of plan – the benefit that the

employee will receive is defined by the terms of the plan. The terms of this type of plan can be based on a variety of factors (years work, amount earned over a certain period, amount earned in year of retirement etc) but the periodic future distributions to employees will always be defined by the terms of the plan.

16

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Benefit Plans Information reporting So what can we report if we wanted to?

• FBAR? We have no account number or account value.
• Form 8938? we have no account number or account value.

We might be able to calculate a present value of a future stream of income, however, the true value of many defined benefit plans is only known once the taxpayer retires.

• Form 3520? Form 3520-A?

17

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Benefit Plans are the easiest foreign plans to report.

18

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Contribution Plans

• Defined contribution plans are characterized by an account

balance that reflects the contributions to the plan earmarked for the particular employee. These accounts are separated by

• employee. The future benefits are based entirely on the value of

the account which in turn is based on the amount contributed and any associated growth of those amounts. The typical U.S. example

• f a defined contribution plan is the 401(k). An employee funds a

401(k) (with or without an employer match) and has an interest in that plan to the extent that he/she has funded it in addition to the extent that employer contributions to his/her plan have vested.

19

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Contribution Plans

• The employee carries the risk/reward for the performance
• f the investments in a defined contribution plan. There is

no guarantee that amounts contributed will be available upon retirement.

20

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Contribution Plans

• Employees do have accounts associated with this type of
• plan. They typically receive annual statements providing an

updated account balance as well as reporting on the performance of their retirement plan.

21

• I. Information Reporting for

Foreign Pensions and Trusts

Defined Contribution Plans

• A literal description of this type of plan – the contributions

to the plan are defined and an employee’s benefit will be based on the amount of contributions and the performance

• f those contributions.

22

• I. Information Reporting for

Foreign Pensions and Trusts

Social Security

• Social security is the government mandated defined benefit

plan in the U.S. Both wage earners and self-employed taxpayers make contributions to social security annually.

23

• I. Information Reporting for

Foreign Pensions and Trusts

Social Security

• Like other defined benefit plans, the benefit that taxpayers

expect to receive from social security is defined and is determined by application of a formula. This formula is applied to their highest earning thirty five years.

24

• I. Information Reporting for

Foreign Pensions and Trusts

Social Security

• Like other defined benefit plans, the benefit that taxpayers expect

to receive from social security is defined and is determined by application of a formula. This formula is applied to their highest earning thirty five years. 40 quarters of maximum contributions = maximum benefit.

• There’s actually stories of self-self-employed individuals filing

fraudulent returns showing more self-employment liabilities than they owed in order to get the maximum social security pay out. Benefits are calculated on what you should have paid, not what you actually paid.

25

• I. Information Reporting for

Foreign Pensions and Trusts

Let’s figure out what we have Classification of foreign retirement plans

• Foreign retirement plans have independent filing requirements with the

United States when they are directly invested in the United States and are generating U.S. source income. Most of the foreign retirement plans that are reportable in the United States are reportable because they are funded by, owned by, or are distributing to U.S. persons.

• This means the first step in evaluating the required informational

reporting for a foreign retirement plan is determining when and how the Taxpayer became a U.S. person. This will also help you to determine if adequate reporting has been done for prior years and if the Taxpayer should amend previous returns.

26

• I. Information Reporting for

Foreign Pensions and Trusts

Classification of foreign retirement plans When attempting to understand a foreign retirement plan, always start with the Taxpayer’s explanation of that plan. It is possible that the taxpayer may not be able to provide all of the required information relating to the foreign retirement plan. A thorough review of the plan documentation may provide additional information (and be aware that this review may often contradict information provided by the Taxpayer.) Often the Taxpayer is the best resource in acquiring plan documentation that has been translated into English. And no, you are no required to get certified translations.

27

• I. Information Reporting for

Foreign Pensions and Trusts

Classification of foreign retirement plans Lastly, it is often useful to independently research the mechanics of the retirement system and the retirement plans in the country in which the Taxpayer has a retirement plan. There’s a host of arguments you might be able to make by knowing a little bit more about the country in which your client has retirement plan. Thing like:

28

• I. Information Reporting for

Foreign Pensions and Trusts

Like… 1.Determine when and how the plan was opened. Was the plan opened by the employer or the employee? Was the plan open incidentally to employment

• r was it independently opened by the Taxpayer?

2.Determine when and how the plan was funded. Determine the percentage

• f contributions that were made by the employee and the percentage that

were made by the employer. 3.Determine how the plan distributes and how the amount distributed is determined. 4.Determine if contributions to the plan are pre-tax or post-tax in the foreign jurisdiction. 5.Determine if distributions from the plan are taxable or non-taxable in the foreign jurisdiction. 6.Gather information regarding plan participation by other employees, including: is the plan government mandated for all employees? Is the plan available to all employees? Is the plan only available to executives or highly compensated employees?

29

• I. Information Reporting for

Foreign Pensions and Trusts

Now determine the Appropriate U.S. Analogue to the Foreign Retirement Plan… Using the gathered information, determine whether the plan is a defined contribution plan or a defined benefit plan. The

• utcome of this analysis will significantly impact the

informational reporting required.

30

• I. Information Reporting for

Foreign Pensions and Trusts

And what about foreign annuities…

• Foreign annuities, like domestic annuities, are taxable under

IRC 72. IRC 72 does have some special provisions for determining your cost in the contract for contributions that were made when the taxpayer was a nonresident alien. Nonresident alien contributions that were not taxable in the U.S. or a foreign country are not included in your cost in the contract.

31

• I. Information Reporting for

Foreign Pensions and Trusts

And what about foreign annuities…

• For example, if an annuity begins distributing in the first year

that a Taxpayer becomes a U.S. person, the Taxpayers contributions were not taxable in the foreign country and the growth was not taxable in the foreign country, then the full amount of the distribution will be taxable in the U.S. when it is distributed.

32

• I. Information Reporting for

Foreign Pensions and Trusts

Foreign social security

• Not all foreign countries have social security programs that

are similar to the U.S. social security, so it is necessary to review the details of the foreign social security plans to confirm that it functions like a defined benefit plan.

33

• I. Information Reporting for

Foreign Pensions and Trusts

International Information Reporting Forms Relevant to Foreign Retirement Plans Overview 3520, 3520-A, 8938, FBAR, 8865 and 5471 The purpose of this section is to provide some context for these forms so that listeners can understand the more thorough 402(b) and grantor trust analysis later, as well as to give them an understanding of the filing mechanics as disregarding these mechanics can result in failure to file penalties.

34

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520 is required to report a transfer to a foreign trust (Part 1), ownership of a foreign trust (Part 2), a distribution to a U.S. person from a foreign trust (Part 3) and gifts from foreign persons and foreign entities (Part 4). Form 3520 is required in many circumstances in which Form 3520-A is not.

35

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520 is often required when reporting transactions between a foreign retirement plan and a Taxpayer (contributions to, ownership of, and distributions from) because the U.S. generally treats foreign retirement plans as

• trusts. There are a number of exceptions to 3520 reporting

for foreign retirement plans, the most significant exception coming from 402(b).

36

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520 is due on the due date for a Taxpayer’s personal 1040, including six month extensions and the automatic 2-month extension for Taxpayers living outside of the U.S., but note that if an extension has been filed for the Taxpayer’s personal return that this must be indicated on form 3520 (page 1 line k) and for Taxpayer’s utilizing the automatic 2-month extension, a statement indicating that you live outside of the U.S. and qualify for the automatic 2-month extension. Including this statement is important as failure to do so can result in a failure to file penalty for your Form 3520.

37

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520 has special mailing instructions and is not filed with the 1040. Form 3520 is mailed to: Internal Revenue Service Center, P.O. Box 409101 Ogden, UT 84409

38

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner Form 3520-A is only required when the foreign retirement plan is treated as having a U.S. owner (see 402(b) and grantor trust sections later).

39

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner Whenever a Taxpayer has a 3520-A requirement, they have a corresponding Part II 3520 requirement.

40

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner Form 3520-A requires a complete accounting of the activity of the foreign trust (income statement and balance sheet) as well as a summary of the U.S. Taxpayer’s relationship to the foreign trust and the income that flows through to the Taxpayer. International accounting standards must be converted to GAAP. Not using GAAP can be tantamount to filing “substantially incomplete.”

41

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner There are two different ways to file Form 3520-A:

• The Form 3520-A can be filed ‘by the trust’ or,
• A substitute Form 3520-A can be filed by the Taxpayer.

42

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner The deadlines and filing requirements for Form 3520-A change depending on which method is utilized.

• A Form 3520-A that is being filed by the trust must be filed by the 15th day of

the third month after the end of the trust’s tax year, which generally means by March 15th. This means that, despite the fact that the filing obligation arises through the Taxpayer, Form 3520-A has an earlier deadline than the Taxpayer’s personal return.

• Another important note regarding the mechanics of filing Form 3520-A on

behalf of the trust is that it is not filed under the Taxpayer’s identifying number, and instead requires its own employer identification number.

43

• I. Information Reporting for

Foreign Pensions and Trusts

Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner

• A Form 3520-A being filed ‘by the trust’ can extend the due

date for filing by six months by filing form 7004. Again it is important to note that this 7004 must have the trust’s EIN.

44

• I. Information Reporting for

Foreign Pensions and Trusts

Form 8938: Statement of Specified Foreign Financial Assets

• Form 8938 is commonly referred to as the “FATCA” form

and is effectively the tax version of the FBAR.

• Created in Hire Act of 2010 (FATCA was a PAYGO offset).

Meaning prior to 2010, there was no Form 8938 filing

• bligation.
• Failure to file one (or filing one substantially incomplete)

when required keeps the entire return open, just like Form 5471, form 3520-A, Form 3520, and others.

45

• I. Information Reporting for

Foreign Pensions and Trusts

Form 8938: Statement of Specified Foreign Financial Assets Form 8938 requires information on a Taxpayer’s foreign accounts as well as a Taxpayer’s ‘other assets’. This is an important distinction from FBAR reporting and can result in differences in the FBAR reporting regarding foreign retirement plans and the Form 8938 reporting.

46

• I. Information Reporting for

Foreign Pensions and Trusts

Form 8938: Statement of Specified Foreign Financial Assets Foreign retirement plans that are adequately disclosed on

• ther international information forms do not have to be

separately listed on part V or part VI of Form 8938 and instead the number of international information forms filed for the retirement plan is disclosed on part IV of Form 8938, Excepted Specified Foreign Financial Assets.

47

• I. Information Reporting for

Foreign Pensions and Trusts

Form 8938: Statement of Specified Foreign Financial Assets

• Any foreign retirement plans that are not included on part IV of

Form 8938 and are not disclosed on form 3520 or form 3520-A, do need to be included on Form 8938.

• For example, if you have a foreign defined benefit plan that has

begun distributing, this plan will be disclosed on part VI of Form 8938 as an ‘other asset’ to the extent that there are distributions in the current year.

• A second example – if you have a 402(b) foreign retirement plan

that is exempted from Form 3520 and Form 3520-A reporting, you will include that plan’s accounts on part V of Form 8938.

48

• I. Information Reporting for

Foreign Pensions and Trusts

FBAR: Report of Foreign Bank and Financial Accounts

• The FBAR is the reporting form for (1) financial interest in, or

(2) signatory authority over foreign accounts.

• The FBAR is filed separately from your tax return and is due
• n April 15th with an automatic extension to October 15th for

filers who do not file by October 15th. The old rule had all FBARs filed on June 30th.

• If TFFAAA is passed, we believe FBAR reporting will still be

required.

49

Part II: Foreign Grantor Trust v. Foreign Nongrantor Trust Overview

Sean J. O’Connor, Esq. Supervising Attorney Parent & Parent LLP sjo@irsmedic.com

• II. Foreign Grantor Trust v. Foreign Nongrantor

Trust Overview

Foreign Nongrantor Trusts:

• Respected as separate Legal entities for U.S.

tax purposes.

• Not disregarded under the grantor trust rules.
• 1040-NR filing obligation for U.S. source

income for the trust.

• Transfers to nongrantor trust can result in

gain recognition for U.S. transferor.

• Gift tax consequences on transfers to

nongrantor trusts.

• U.S. beneficiaries subject to accumulation

distribution and throwback tax rules and must complete Form 3520 part III.

Foreign Grantor Trusts:

• Not respected as separate Legal entities for

U.S. tax purposes.

• One or more U.S. persons treated as owning

the foreign trust under the “grantor trust rules” IRC 671-679.

• Income, expenses, and asset ownership flow

through to the U.S. owners and maintain their

• character. (no deferral)
• No gift tax consequences for transfers in.
• No accumulation distribution or throwback

tax computations.

52

53

Part III: 402(b) Employees’ Trust

Sean J. O’Connor, Esq. Supervising Attorney Parent & Parent LLP sjo@irsmedic.com

54

• III. 402(b) Employees’ Trust
• 402(b) Employees’ trusts are nonexempt trusts.
• 402(b) Employees’ trusts are excepted from the grantor trust

rules.

• 402(b) Employees’ trusts are trusts that would otherwise be

grantor trusts but for this exception.

• Official guidance for 402(b) employees’ trust application to

foreign retirement plans is limited.

55

IRC 402(b)(1)

(b) Taxability of beneficiary of nonexempt trust (1) Contributions

• Contributions to an employees’ trust made by an employer during a

taxable year of the employer which ends with or within a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section.

56

IRC 402(b)(2)

–(2) Distributions

• The amount actually distributed or made available to any

distributee by any trust described in paragraph (1) shall be taxable to the distributee, in the taxable year in which so distributed or made available, under section 72 (relating to annuities), except that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(5) (relating to amounts not received as annuities).

57

26 U.S. Code § 72(f)

– (f) Special rules for computing employees’ contributions. In computing, for purposes of subsection (c)(1)(A), the aggregate amount of premiums or other consideration paid for the contract, and for purposes of subsection (e)(6), the aggregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that— – (1) such amounts were includible in the gross income of the employee under this subtitle or prior income tax laws; or – (2) if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution. – Paragraph (2) shall not apply to amounts which were contributed by the employer after December 31, 1962, and which would not have been includible in the gross income of the employee by reason of the application of section 911 if such amounts had been paid directly to the employee at the time of contribution…

58

26 U.S. Code § 72(w)

• (w) Application of basis rules to nonresident aliens

– (1) In general – Notwithstanding any other provision of this section, for purposes of determining the portion of any distribution which is includible in gross income of a distributee who is a citizen or resident of the United States, the investment in the contract shall not include any applicable nontaxable contributions or applicable nontaxable earnings. – (2) Applicable nontaxable contributionFor purposes of this subsection, the term “applicable nontaxable contribution” means any employer or employee contribution—

• (A) which was made with respect to compensation—

– (i) for labor or personal services performed by an employee who, at the time the labor or services were performed, was a nonresident alien for purposes of the laws of the United States in effect at such time, and – (ii) which is treated as from sources without the United States, and

• (B) which was not subject to income tax (and would have been subject to income tax if paid as cash compensation

when the services were rendered) under the laws of the United States or any foreign country.

– (3) Applicable nontaxable earningsFor purposes of this subsection, the term “applicable nontaxable earnings” means earnings—

• (A) which are paid or accrued with respect to any employer or employee contribution which was made with respect

to compensation for labor or personal services performed by an employee,

• (B) with respect to which the employee was at the time the earnings were paid or accrued a nonresident alien for

purposes of the laws of the United States, and

• (C) which were not subject to income tax under the laws of the United States or any foreign country.

59

IRC 402(b)(3)

–(3) Grantor Trusts

• A beneficiary of any trust described in paragraph (1) shall not be

considered the owner of any portion of such trust under subpart E

• f part I of subchapter J (relating to grantors and others treated as

substantial owners).

60

26 CFR 1.402(b)-1(b)(6)

–(6) Treatment as owner of trust.

• In general, a beneficiary of a trust to which this section applies may not be considered to

be the owner under subpart E, part I, subchapter J, chapter I of the Code of any portion of such trust which is attributable to contributions to such trust made by the employer after August 1, 1969, or to incidental contributions made by the employee after such date. However, where contributions made by the employee are not incidental when compared to contributions made by the employer, such beneficiary shall be considered to be the

• wner of the portion of the trust attributable to contributions made by the employee, if

the applicable requirements of such subpart E are satisfied. For purposes of this paragraph (6), contributions made by an employee are not incidental when compared to contributions made by the employer if the employee's total contributions as of any date exceed the employer's total contributions on behalf of the employee as of such date.

61

IRC 402(b)(4)

– (4) Failure to meet requirements of section 410(b)

• (A) Highly compensated employees

If 1 of the reasons a trust is not exempt from tax under section 501(a) is the failure of the plan of which it is a part to meet the requirements of section 401(a)(26) or 410(b), then a highly compensated employee shall, in lieu of the amount determined under paragraph (1) or (2) include in gross income for the taxable year with or within which the taxable year of the trust ends an amount equal to the vested accrued benefit of such employee (other than the employee’s investment in the contract) as of the close of such taxable year of the trust.

• (B) Failure to meet coverage tests

If a trust is not exempt from tax under section 501(a) for any taxable year solely because such trust is part of a plan which fails to meet the requirements of section 401(a)(26) or 410(b), paragraphs (1) and (2) shall not apply by reason of such failure to any employee who was not a highly compensated employee during—

– (i) such taxable year, or – (ii) any preceding period for which service was creditable to such employee under the plan.

• (C) Highly compensated employee

For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).

62

Additional 402(b) Guidance

• IRS Memoranda
• Private Letter Rulings
• FOIA Australian Superannuation Materials
• More guidance is needed and has been requested

(ABA and GAO)

63

Informational Reporting for Foreign 402(b) Plans

• Do 402(b) plans require Form 3520-A?
• Do 402(b) plans require Form 3520 part I or part II?
• Do 402(b) plans require Form 3520 part III?
• Do 402(b) plans need to be reported on Form 8938?
• Do 402(b) plans need to be reported on FBARs?
• Is Form 8621 required for foreign mutual funds within a

402(b) plan?

64

Overview of How To Approach a 402(b) Trust

Step 1 – Understand the plan.

• Review plan documentation and discuss the mechanics of the plan with your

client.

• Gather details on taxpayer and employer contributions, including the vesting

details for employer contributions.

• Determine if this is a government mandated plan.
• Determine if taxpayer made any additional voluntary contributions.
• Determine if the taxpayer paid taxes in the U.S. or in a foreign country on the

contributions to the plan (when made or when vested).

• Determine if the taxpayer has paid any taxes on the growth of the plan
• Determine if the taxpayer has or will have to pay taxes on the distributions

from the plan in the foreign country.

• Gather information to determine if the taxpayer will be considered a highly

compensated employee.

65

Overview of How To Approach a 402(b) Trust

Step 2 – Determine the client’s interactions with the plan.

• Is the plan still being funded?
• Is it accumulating for future distribution upon reaching

retirement age?

• Are the funds presently available for distribution and are

there any limitations on those distributions?

• Has the plan ever been ‘rolled’ over?

66

Overview of How To Approach a 402(b) Trust

Step 3 – Review the relevant tax treaty.

• This is a critical step that will be addressed in more detail later.

Step 4 – Explain the issues to your client.

• The IRS processes these plans inconsistently, even at audit.
• The official guidance relating to 402(b) is inconsistent.
• Explain the potential financial impact of a contrary determination.

67

Foreign Retirement Plans Classified as Grantor Trusts

Issues Overview

• Grantor Trust Rules (When is a foreign retirement plan a

grantor trust?)

• Form 3520 and Form 3520-A Reporting for Foreign Grantor

Trusts (“FGTs”)

• Practice Tips for Preparing Form 3520 and Form 3520-A.
• FGTs with Corporate Trustees and Form 5471.
• Interaction between FGTs and Form 8621, Form 8938, and

FBAR Reporting.

68

Part IV: Grantor Trust Rules

Sean J. O’Connor, Esq. Supervising Attorney Parent & Parent LLP sjo@irsmedic.com

69

Grantor Trust Rules

• 26 U.S. Code § 671 - Trust income, deductions, and credits

attributable to grantors and others as substantial owners

• 26 U.S. Code § 673 - Reversionary interests
• 26 U.S. Code § 674 - Power to control beneficial enjoyment
• 26 U.S. Code § 675 - Administrative powers
• 26 U.S. Code § 676 - Power to revoke
• 26 U.S. Code § 677 - Income for benefit of grantor
• 26 U.S. Code § 678 - Person other than grantor treated as

substantial owner

• 26 U.S. Code § 679 - Foreign trusts having one or more United

States beneficiaries

70

Form 3520 and Form 3520-A Reporting for Foreign Grantor Trusts

• Form 3520 and Form 3520-A or Form 3520 and

a substitute Form 3520-A need to be prepared for every retirement plan classified as a foreign grantor trust.

• Form 3520 Line 22

71

Form 3520 and Form 3520-A Reporting for Foreign Grantor Trusts

• Form 3520 Line 13 – FMV. Realized gain on

appreciated assets. Notes in exchange for contributions.

72

Form 3520 and Form 3520-A Reporting for Foreign Grantor Trusts

• Form 3520 Line 29 – Beneficiary Statement for

Distributions

73

Form 3520 and Form 3520-A Practice Tips

• Conversion rates
• Calendar year reporting
• Accounting in accordance with GAAP
• Appointing a U.S. agent
• Owner statement and Beneficiary statement

74

Corporate Trustees for Foreign Retirement Plans

• Taxpayers are the sole members of a corporation that serves as

trustee for the foreign retirement plan.

• Form 5471 reporting is required.
• Do not need for duplicative reporting of assets and income.
• Separate failure to file penalty for 5471.
• Doesn’t insulate Taxpayer from having signatory authority over

underlying accounts.

75

Trust Bifurcation: FGT and 402(b)

• $60 Grantor Trust.
• 60% of plan growth is taxed

annually via 3520-A.

• 60% of plan value is not

taxable upon distribution.

• Allocate assets evenly.
• $40 Employees’ Trust.
• 40% of plan growth is tax

deferred.

• 40% of plan value is taxable

upon distribution via IRC 72.

• Allocate assets evenly.

If Taxpayer contributed $60 and employer contributed $40

76

• V. The Applicability of Tax Treaties

Robert V. Hanson, Esq. Lead International Attorney Parent & Parent LLP rvh@irsmedic.com

Treaty benefits?

• US Tax Treaties may provide relief from double taxation (or

even single taxation).

• Beware of the “savings clause.”
• Not all treaties are created equal.

79

Usual Tax Treaty Resources

• 1. Treaty
• 2. Protocol
• 3. Technical Explanation
• 4. Memorandum of Understanding
• 5. Exchange of Notes

80

Typical Examples

• UK pensions
• Swiss Pillar I, II, and III pensions
• Singaporean CPFs
• Malaysian CPFs
• Hong Kong MPFs
• German pensions
• Australian superannuation funds

81

Case Studies

• US-UK Treaty (2001)
• US-Germany Treaty (1989)
• US-Australia Treaty (1982)

82

United States // United kingdom

Case 1

83

US-UK Scenario

• A client calls you in a panic. She just learned that she might

have a problem with the pension she has with her in the UK. It is pension provided and funded by her employer exclusively.

• You have determined that it is a grantor’s trust. Can the US-UK

treaty help?

84

US-UK Treaty

85

Start with the “Savings Clause”

Article 1

• 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.

86

US-UK Treaty “claw-back”

Original (2001) Article 1

• 5. The provisions of paragraph 4 of this Article shall not

affect: a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub- paragraph b) of paragraph 1 and paragraphs 3 and 5

• f Article 17 (Pensions, Social Security, Annuities,

Alimony, and Child Support), paragraph 1 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this Convention; and b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens

• f, nor have been admitted for permanent residence

in, that State. Protocol (2001) Article 1

• The provisions of paragraph 4 of this Article shall not

affect: a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub- paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this Convention; and b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.”

87

US-UK Tax Treaty Article 17

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

• 1. a). . .
• b) Notwithstanding sub-paragraph a) of this paragraph, the amount
• f 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.

• 3. Notwithstanding the provisions of paragraph 1 of this Article,

payments made by a Contracting State under the provisions of the social security or similar legislation of that State to a resident of the

• ther Contracting State shall be taxable only in that other State.
• 5. Periodic payments, made pursuant to a written separation

agreement or a decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be exempt from tax in both Contracting States, except that, if the payer is entitled to relief from tax for such payments in the first-mentioned State, such payments shall be taxable only in the other State.

88

US-UK Tax Treaty 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).

• 2. Where an individual who is a member or beneficiary of, or participant in, a

pension scheme established in a Contracting State exercises an employment or self-employment in the other Contracting State:

• a) contributions paid by or on behalf of that individual to the pension scheme during the period that

he exercises an employment or self-employment in the other State shall be deductible (or excludable) in computing his taxable income in that other State; and

• b) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or
• n behalf of the individual’s employer, during that period shall not be treated as part of the

employee’s taxable income and any such contributions shall be allowed as a deduction in computing the business profits of his employer in that other State. The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension scheme established in that State.

89

US-UK ARTICLE 18 Pension Schemes (Cont.)

5.

• a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United

Kingdom the income from which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom,

• (i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the

employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and

• (ii) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of

the individual’s employer, during that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the United Kingdom.

• b) The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to

its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United States.

• c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a

pension scheme established in the United States, contributions made to, or benefits accrued under, a pension scheme established in the United Kingdom shall be treated as contributions or benefits under a generally corresponding pension scheme established in the United States to the extent reliefs are available to the individual under this paragraph.

• d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension scheme

generally corresponds to a pension scheme established in the United States

90

Result

1.Article 18 p1: Won’t apply to a US person living in the

UK who holds a UK pension.

2.Article 18 p5:

• No taxable contributions
• No taxable growth

Note: The relief is in the body of the treaty, but the protocol has the fix for the savings clause.

91

United States // Germany

Case 2

92

Scenario

• Taxpayer, a US citizen, calls you. He lives in Germany, works

for a German employer, and holds an employer funded pension that both he and his employer contribute to. He just read an article online about possible reporting for foreign pensions and trusts, and he is afraid he might owe tax.

93

US-Germany Treaty

94

US-GER – Savings Clause “claw-back”

Original 1989

• b) The provisions of subparagraph a) shall not affect

the benefits conferred by the United States aa) under paragraph 2 of Article 9 (Associated Enterprises), paragraph 6 of Article 13 (Gains), paragraphs 3 and 4 of Article 18 (Pensions, Annuities, Alimony, and Child Support) and paragraphs 1 c) and 2 of Article 19 (Government Service; Social Security), and under Articles 23 (Relief from Double Taxation), 24 (Nondiscrimination), and 25 (Mutual Agreement Procedure); and bb) under paragraph 1 b) of Article 19 (Government Service; Social Security), and under Articles 20 (Visiting Professors and Teachers; Students and Trainees) and 30 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have immigrant status in, the United States.

Protocol 2006

• 5. The provisions of paragraph 4 shall not affect the

benefits conferred by the United States: a) under paragraph 2 of Article 9 (Associated Enterprises), paragraph 6 of Article 13 (Gains), paragraphs 3, 4 and 5 of Article 18 (Pensions, Annuities, Alimony, Child Support, and Social Security), paragraph 1 and 5 of Article 18A (Pension Plans), paragraph 3 of Article 19 (Government Service), and under Articles 23 (Relief from Double Taxation), 24 (Nondiscrimination), and 25 (Mutual Agreement Procedure); and b) under paragraph 2 of Article18A (Pension Plans), subparagraph b) of paragraph 1 of Article 19 (Government Service), and under Articles 20 (Visiting Professors and Teachers; Students and Trainees) and 30 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have immigrant status in, the United States.

95

US-GER PENSION PROVISIONS 18

Original 1989

• 1 c) Pensions, annuities, and other amounts paid

by one of the Contracting States or by a juridical person organized under the public laws of that State as compensation for an injury or damage sustained as a result of hostilities or political persecution shall be exempt from tax by the other State.

• 2. Social security benefits paid under the social

security legislation of a Contracting State and

• ther public pensions (not dealt with in paragraph

1) paid by a Contracting State to a resident of the

• ther Contracting State shall he taxable only in

that other Contracting State. In applying the preceding sentence, that other Contracting State shall treat such benefit or pension as though it were a social security benefit paid under the social security legislation of that other Contracting State.

Protocol 2006

• 5. Social security benefits paid under the

social security legislation of a Contracting State and other public pensions (not dealt with in Article 19 (Government Service)) paid by a Contracting State to a resident of the other Contracting State shall be taxable

• nly in that other Contracting State. In

applying the preceding sentence, that other Contracting State shall treat such benefit or pension as though it were a social security benefit paid under the social security legislation of that other Contracting State.

96

Article 18A Pension Plans

• 5. a) Where a citizen of the United States who is a resident of the Federal Republic of

Germany exercises an employment in the Federal Republic of Germany the income from which is taxable in the Federal Republic of Germany and is borne by an employer who is a resident of the Federal Republic of Germany or by a permanent establishment situated in the Federal Republic of Germany, and the individual is a beneficiary of, or participant in, a pension plan established in the Federal Republic of Germany, aa) contributions paid by or on behalf of that individual to the pension plan during the period or attributable to the period that he exercises the employment in the Federal Republic of Germany, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and bb) any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period or attributable to that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the Federal Republic of Germany.

97

Article 18A Pension Plans (cont.)

• b) The relief available under this paragraph shall not exceed the relief

that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension plan established in the United States. c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a pension plan established in the United States, contributions made to, or benefits accrued under, a pension plan established in the Federal Republic of Germany shall be treated as contributions or benefits under a generally corresponding pension plan established in the United States to the extent relief is available to the individual under this paragraph. d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension plan generally corresponds to a pension plan established in the United States.

98

Result

1.Article 18 won’t apply to a US citizen residing in

Germany.

2.Article 18A

• No tax on contributions
• No tax on growth, with caveats.

Note: The relieving article is in the protocol, not the main body of the tax treaty.

99

United States // Australia

Case 3

100

US-AUSTRALIAN SCENARIO

• A client comes to your office who immigrated from Australia in

2015 on an E3 visa after having worked in Australia for 20

• years. During your talk, he casually mentions his employer

funded/created superannuation and his self-managed

• superannuation. He expects to start drawing from his

superannuation funds in five years.

101

US-Australia Treaty

https://www.irs.gov/businesses/international-businesses/australia-tax-treaty-documents; visited January 15, 2019 102

US-AUS Tax Treaty “claw- back”

• Article 1
• (4) The provisions of paragraph (3) shall not affect:

(a) the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or (b) the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).

103

US-AUS ARTICLE 18

Pensions, Annuities, Alimony and Child Support

• (2) Social Security payments and other public pensions paid by
• ne of the Contracting States to an individual who is a resident
• f the other Contracting State or a citizen of the United States

shall be taxable only in the first-mentioned State.

104

US-AUS Technical Explanation

• Paragraph 2 provides that public pensions, such as social

security benefits, paid by one Contracting State to a resident of the other State or to a citizen of the United States are taxable only in the paying State. The reference to U.S. citizens is to ensure that a social security payment by Australia to a U.S. citizen resident in Australia shall be taxable only in Australia and not in the United States. The exemption of such income provided by this paragraph is excepted from the saving clause under paragraph 4 of Article 1 (Personal Scope).

105

Is a superannuation fund covered?

• Government pension system

– Old Age Pension

• Employment-based pension

system

– Superannuation Funds

• Supplemental voluntary

personal savings

• Government pension system

– Social Security

• Employment-based pension

system

– 401(k)

• Supplemental voluntary

personal savings

106

Is a superannuation fund covered?

Australia Superannuation

• Mandatory
• Publicly regulated
• Funded
• Secured
• Mandatory
• Publicly administered
• Unfunded
• Unsecured

107

Is a superannuation fund covered?

• Varieties of Superannuation Funds
• Employer-sponsored funds
• Created for the benefit of employees of the

employer

• Public sector funds
• Created for the benefit of employees in an

industry

• Self-managed super funds
• Less than five members, self-managed,

regulated by the Australian Tax Office

108

Is a superannuation fund covered?

The “spirit” versus the “letter”

For:

• Australia modified their social security

system in 1991, 1992, 1999 – after the 1982 treaty

• Australia in 1999 showed its intent to

replace its age pension with super funds

• US SSTA recognizes supers as “social

security”

• OECD, other conventions accept

similar funds to be “social security”

• The ER contribution is mandatory and

can be characterized as a tax

• Social Security is most like a defined benefit

plan

• The supers created are defined contribution

plans

• The argument “for” does not reference on-

point IRC nor sufficiently addresses US intent

• IRS has issued PLRs holding that supers are

trusts

• These are US not OECD treaties
• The treaty addresses remittances from

“Social Security” or other similar public pensions, not contributions or growth

• Payments will be made by regulated, but not

public, institutions

• Protocol in 2001 did not address it

Against:

109

What to do?

• What we think the law is, what the law should be, and what the

IRS will do.

• What is your role as the attorney or CPA?
• What is your client’s risk tolerances?
• Trade-offs?

110

How to report a treaty position?

• IRC 6114
• 301.6114-1 “Treaty-based return

positions.”

• Form 8833

111

How to report a treaty position?

§ 301.6114-1

• (c) Reporting requirement waived.

(1) Pursuant to the authority contained in section 6114 (b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer: (iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers. . . .

112

How to report a treaty position

Form 8833

113

• VI. Identifying and

remedying misreporting

Robert V. Hanson, Esq. Lead International Attorney Parent & Parent LLP rvh@irsmedic.com

114

Scenario

• A client comes to you. She has been audited for her business,

and during examination it came out that she has a self-funded pension in the United Kingdom. The client asks you how can she avoid penalties for non-filing of forms 3520 and 3520A?

115

Available Disclosure Options

• Streamlined Filing Compliance Procedures
• Streamlined Foreign Offshore

Procedures

• Streamlined Domestic Offshore

Procedures

• Offshore Voluntary Disclosure Practice
• Delinquent International Information Return Submission Procedures

116

(Delinquent) International Information Reporting Forms

Form Code Section 8938

• Sec. 6038D

3520

• Sec. 6677

3520-A

• Sec. 6677

117

Decision Tree

• Must you file? Y/N
• Did you file? Y/N
• Penalty.

(Delinquent) International Information Reporting Forms

118

Reasonable Cause

• The IRM generally provides reasonable cause relief

when the taxpayer exercised ordinary business care and prudence when determining his tax

• bligation but was otherwise unable to comply

[IRM 20.1.1.3.2 (11-21-2007)].

• For informational returns specifically, reasonable

cause exists where the taxpayer (1) acted in a responsible manner and (2) had significant mitigating factors or (3) had circumstances beyond filer’s control [IRM 20.1.7.12.1 (10-12-2017)].

119 119

Reasonable Cause

• Acting in a responsible manner is when the taxpayer

exercises the same level of care of a reasonably prudent person when determining filing obligations; or put another way, a taxpayer is said to be acting in a responsible manner when exercising “ordinary care and prudence.”

• Significant mitigating factors, under IRM 20.1.7.12.1 (10-

21-2017), include being a first time filer, i.e. the filer had not been previously required to file the particular form in question, an overall history of compliance, or was not being previously penalized under the applicable statute.

120 120

Reasonable Cause

• Events beyond filer’s control include
• Reliance on erroneous written information provided by the IRS
• Actions of an agent even though exercised reasonable business

judgment, allowed the agent to timely file correct returns, provided information well in advance of a due date, and there were significant mitigating factors or an event beyond the agent’s control.

• Unavailability of business records as a result of of unforeseen

conditions

• A supervening event such as a fire or casualty loss

[IRM 20.1.7.12.1 (10-12-2017)]

121

Reasonable Cause

• Ordinary Care and Prudence, or Ordinary Business Care
• In Congdon v. U.S. [108 AFTR 2d 2011-6343 (E.D. Texas,

2011)], the IRS sought to impose penalties on a taxpayer for failure to file form 5471 and maintained that the taxpayer did not have reasonable cause because of ignorance of the law or complexity. The court held for the taxpayer, stating that while ignorance of the law alone is insufficient to constitute reasonable cause, inexperience in tax matters, the complexity of the area of law, and a track record of compliance can show reasonable cause.

122 122

Ignorance of the Law

• IRM 20.1.1.3.2.2.6:
• Reasonable cause may be established if the taxpayer shows ignorance
• f the law in conjunction with other facts and circumstances. For

example, consider the following:

• The taxpayer’s education.
• If the taxpayer has previously been subject to the tax.
• If the taxpayer has been penalized before.
• If there were recent changes in the tax forms or law which a taxpayer

could not reasonably be expected to know.

• The level of complexity of a tax or compliance issue.
• Must also have made a good faith and reasonable effort to comply and

that the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.

123 123

Mistake Was Made

• IRM 20.1.1.3.2.2.4:
• the reason for the mistake may be a supporting factor if additional facts and

circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time.

• Information to consider when evaluating a request for an abatement or non-

assertion of a penalty based on a mistake or a claim of ignorance of the law includes, but is not limited to the following:

• When and how the taxpayer became aware of the mistake.
• The extent to which the taxpayer corrected the mistake.
• The relationship between the taxpayer and the subordinate (if the taxpayer

delegated the duty).

• If the taxpayer took timely steps to correct the failure after it was discovered.
• The supporting documentation.

124 124

Your Task

• How to prepare?
• Call client, review facts, review facts, review facts
• Checklist:
• Citizenship/Resident Status
• Education: Highest degree? Major?
• Work history: Industry? Duties? Title? Licenses?
• Tax prep history: Schedule B? Organizer? Conversation?
• Why the error?
• When/how did you discover your mistake?
• What did you do after your discovery? How quickly did you act?
• What kind of accounts/assets abroad? Pensions? IRAs?
• Why did you open them? Why did you keep them open? Funded?
• Any tax non-compliance? How much?
• Any treaty position?

125