Foreign Tax Filing Requirements Alert.

By DANIEL C. ERTEL CPA - Email Editor

Date : March 4th, 2008

For most US citizens, the tax filing deadline is April 15th, but for some and many of our readers, reporting requirements may start a month early, as foreign trusts have their own unique reporting forms and reporting dates. New rulings could also affect your April 15th filing. Please see details below

Can taxation without representation be any worse than it is with it?
--Sydney J. Harris (1917-1986) Pieces of Eight, 4, 1982

Foreign Tax Filing Requirements Alert
What is a foreign trust? - The IRS defines a foreign trust as any trust other than a domestic trust.

A domestic trust is defined as any trust if:

A court within the U.S. is able to exercise primary supervision over the administration of the trust;
One or more U.S. persons have authority to control all substantial decisions of the trust.

Thus, the first step is to determine whether or not you have a foreign trust, i.e. to review the provisions of a trust document to determine whether or not it meets the requirements of a domestic trust. If it does, then it is not a foreign trust.

The many filing requirements related to foreign trusts are confusing to many taxpayers. Congress has enacted new penalties for improperly reporting foreign trust income.

For example, failure to file Form 3520-A could subject U.S. owners to a penalty of 5% of the gross reportable income plus an additional $10,000 penalty for continued noncompliance.

Creation Of/Transfer to a Foreign Trust
The IRS calls this a reportable event. The filing of Form 3520 is required within 90 days of a trust creation or transfer of property. Failure to file or failure to timely file subjects the responsible person to a penalty of up to 35% of the gross receipts reported.

Annual Income Tax Filings
In addition to the reporting of the trust income on the U.S. owner's tax return, reporting of the trust income on Forms 3520, 3520-A and 1140NR is required. Note that the filing due date for the Form 3520-A is March 15. The Forms 3520 and 1040NR are due by April 15.

One More Tax Filing
If a U.S. person (citizen, resident, domestic corporation, partnership, estate or trust) has either a “financial interest” or “signature authority over” a foreign account, then filing of Form TDF 90-22.1 “Report of Foreign Bank and Financial Accounts” is required by June 30. The threshold-reporting requirement is an account or accounts that exceed $10,000 at any time during the prior year. The term “financial interest” includes record ownership, plus any holder of legal title (nominee, attorney, and agent).

The term “signature authority” includes the power to control disposition of an account alone, or in conjunction with, the power of one or more other persons. Penalty provisions include civil penalties of up to $10,000 for non-willful violations and in the case of willful violations civil penalties of greater than of $100,000 or 50 percent of the amount of the transaction. Criminal violations can result in a fine and/or five years in prison.

We are taxed twice as much by our Idleness, three times as much by our Pride, and four times as much by our Folly, and from these Taxes the Commissioners cannot ease or deliver us by allowing abatement!
--Benjamin Franklin (1706-1790) The Way to Wealth, July 7, 1757.

Tax Law Changes Effective for 2007 Returns
Tax Increase Prevention Act of 2007 – Alternative Minimum Tax (AMT) is a patch designed to prevent millions of taxpayers from being caught up in the alternative minimum tax (AMT) rules. This one-year “patch” raises exemptions from $62,550 to $66,250 for married individuals filing jointly. This patch raises exemptions from $31,275 to $33,125 for married individuals filing separately.

The patch also allows personal nonrefundable credits to offset 2007 AMT liabilities. Applicable personal credits include, but are not limited to, a dependent child, dependent care, adoption credit, retirement saver’s credit, energy efficiency equipment or improvements for the home, hope scholarship and lifetime learning education credits. Mortgage Forgiveness Debt Relief Act of 2007.

There are several provisions in this Act. One provides three-year income exclusion for the qualifying discharge of principal residence debt. Homeowners will be eligible for a reprieve on taxes they would normally owe when their mortgage loan is either fully or partially “forgiven” by the lender. This Act also extends the married joint-filers home sale gain exclusion for home sales after December 31, 2007 to include surviving spouses.

Previously surviving spouses were limited to a $250,000 exclusion, rather than the $500,000 for married joint-filers. The more generous provision is subject to timeline and other requirements. Check with your tax professional for more information on this clause. The 2007 Act also extends the mortgage insurance premium write-off provision for three more years through 2010.

There are some phase-out provisions that may prevent some taxpayers from qualifying for this write-off. Your tax consultant can help determine your possible eligibility.

Daniel C Ertel CPA

Daniel Ertel is a firm of experienced tax oriented CPAs in upstate New York with offices in Schenectady, New York. Their service concentrates in the following areas:

Income, Gift & Estate Tax Return Preparation
Tax Representation Before IRS
Income & Estate Tax Planning
Asset Protection Planning
Design, Install and Administration of Defined Contribution, 401K and Cafeteria Plans
Compilation Financial Statements