US IRS and Foreign Trusts

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On May 21, 2018, the IRS Large Business & International Division ("LB&I") announced its fourth set of compliance campaigns. The six new campaigns include one campaign centered on Forms 3520 and 3520-A compliance. A Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed to report certain transactions regarding foreign trusts under section 6048 of the Internal Revenue Code, including:

Creation of a foreign trust by a U.S. person
Any transfer of money or property to a foreign trust, including by reason of death
Ownership of foreign trusts, including death of the U.S. owner of a foreign trust
Loans and distributions from foreign trusts
Gifts or bequests from foreign individuals or estates
Gifts from foreign corporations or partnerships

A Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, must be filed annually by a foreign trust with a U.S. owner.

The other five new compliance campaigns focus on

(1) withholding, depositing, and reporting requirements of withholding agents under Forms 1042 and 1042-S;

(2) compliance with tax treaties providing for exemptions from U.S. income;

(3) itemized deductions claimed on Form 1040-NR, the U.S. Nonresident Alien Income Tax Return;

(4) tax credits claimed on Form 1040-NR; and

(5) the capitalization of interest associated when the construction of real and certain personal property.

As in prior campaigns, in addition to conducting audits, education of taxpayers and practitioners will be an important aspect of most of these campaigns.