Prologue – Understanding the issue
A 25 year old graduate student in Ottawa, Canada had a Canadian TFSA (“Tax Favoured Saving Account”) with a value of approximately $8000 CDN. After having filed a U.S. tax return he was told by a tax preparer that his “TFSA” was considered to be a “foreign trust” under U.S. tax laws. He then filed a Form 3520 and Form 3520A. By this time his filing was late. He was penalized $10,000 USD (as per Internal Revenue Code § 6677)for his late filing of the form.
About SEAT
The purpose of SEAT is to provide education and advocacy for the purpose of ending the U.S. extraterritorial tax regime. I believe that SEAT is the only organization which has adopted this as its singular goal. SEAT has developed a large number of working papers, research papers, surveys and submissions to Treasury and Government committees since its inception.
In September of 2023, SEAT along with AARO prepared an amicus brief in the Moore case.
Recently SEAT members Laura Snyder and John Richardson presented a paper at the Migration Conference held in Mexico City.
Although the goal has been and continues to be to end U.S. citizenship taxation (as opposed to improving it), SEAT also provides commentary and submissions about regulatory changes which may affect Americans abroad.
SEAT is a non-partisan organization that neither seeks nor has ever accepted donations from the general public. To be clear: SEAT is self-funded, self-motivated and is beholden to no special interest groups.
SEAT is currently seeking responses for its new and updated survey. If you are reading this post please participate in the survey here.
Participation in the August 21, 2024 Treasury hearing about the Foreign Trust and Foreign Gift regulations
On May 8, 2024 the U.S. Treasury proposed massive regulatory changes to the reporting (and penalty laden) “Foreign Trust” (do you even know whether you have one?) and “Foreign Gift” rules (be careful of receiving gifts from foreigners!). On this occasion SEAT: 1. Prepared a lengthy written submission and 2. John Richardson made an oral presentation in the August 21, 2024 hearing (agenda here) to offer SEAT’s comments about the regulations.
A brief history of Internal Revenue Code 6048 and Form 3520
Internal Revenue Code 6048 was enacted in 1996. The purpose was to require reporting of interaction with “foreign trusts”. The evil 6048 was designed to combat was U.S. residents who transferred capital outside the United States into trusts in other countries. It is obvious that this is the complete opposite of the situation of Americans abroad with pensions and tax favored accounts in their country of residence. It is questionable whether the pensions of Americans abroad are trusts to begin with. Even if they are trusts, they are certainly NOT what IRC 6048 was designed to combat. Furthermore, IRC 6048 was enacted long before FATCA and Form 8938. It is clear that the pensions and tax favored accounts held by Americans abroad are “Foreign Financial Assets” which are reportable on Form 8938 (and possibly FinCEN 114).
The factual history confirms that:
1. IRC 6048 was NEVER intended to apply to the lives of Americans abroad; and
2. Since 2011, foreign pensions and tax favored accounts are reportable on Form 8938.
What the proposed regulations and hearing was NOT about:
The proposed regulation was NOT about whether the pensions and tax favored accounts of Americans abroad are “trusts”
What the proposed regulation WAS about:
Assuming (without deciding) that the pensions and tax favored accounts of Americans abroad ARE “trusts”, is it appropriate for them to be reported on Form 3520?
What exactly is the issue (in people talk and not in taxspeak)?
Foreign pensions and tax favored accounts (local to Americans abroad) are “foreign financial assets” reportable on Form 8938 (and possibly FinCEN 114). This means that (by and large) the IRS already knows about them. From the perspective of Americans abroad, the issue is whether these normal retirement and financial products, should ALSO be required to be reported on IRS Form 3520. The failure to file or a late filing Form 3520 is accompanied by a penalty of 35% of the value of the pension.
To put it another way:
The issue is whether Americans abroad should be subject to a penalty of 35% of the value of their pensions for a failure to report them on Form 3520 as (possibly) prescribed by the Internal Revenue Code!
It’s fairly obvious (isn’t it?) that the answer is:
NO people should not be subjected to these kinds of requirements and penalties whether these things are trusts or not (nobody knows)!!
John’s primary point (an attempt to cut through the BS) was that:
The pensions and tax favored investment/savings accounts of U.S. citizens living outside the United States should have a blanket exemption from Form 3520 and Form 3520A reporting. Those interested in more detail can read the SEAT submission (Appendix A), the transcript of the hearing below (Appendix B), listen to the Audio (Appendix C) and listen to a discussion a few days later on IRS Medic (Appendix D).
To quote from the transcript of the hearing:
But I’m going to say flat out, I would encourage Treasury to adopt a rule that foreign pension plans and accounts that are tax favored under the laws of the country where somebody lives in should be completely exempt from 3520 and the application of 6048. And there’s all kinds of reasons for this, but mainly because it’s going to avoid the distracting issue of what is a trust, what is not a trust, et cetera. I mean, does this really matter? Isn’t the issue really how does this particular product or investing in this type of thing, what is it designed to facilitate? It’s not tax evasion, obviously, because things are regulated. These are exactly the same types of things that have their functional equivalent in the United States. There may be technical differences, but there is no functional difference. And there’s certainly no risk of tax evasion in either way.
Why the formulation of this regulation is particularly important for Americans abroad
Will any of these thoughts/submissions make their way into the final regulation? Treasury may decide to continue to subject Americans abroad to the “Sword Of Penalties” for the crime of living a normal life outside the USA.
Treasury will clarify whether its treatment of Americans abroad is the result of an “unintended consequence” or intentional
1. Americans abroad expressed their anguish in the form of approximately 1500 comments.
2. Five of the six presenters at the August 21, 2024 hearing were focused exclusively on the reporting requirements of Americans Abroad.
3. Because of the hearing and the comments, Treasury understands the unfair application of the foreign trust statute (IRC 6048) and regulations on Americans abroad.
Therefore:
If Treasury chooses to NOT exempt the pensions and tax favored accounts of Americans abroad from 3520 reporting, it is clear that the Form 3520 reporting requirement is intended to a “penalty fundraiser”.
Should this insanity continue, those who can renounce U.S. citizenship should renounce U.S. citizenship.
The ONLY solution to this problem is the complete elimination of citizenship taxation. What this means is that:
Citizenship must be completely severed from (and therefore be irrelevant to) tax residency.
An excellent summary of the hearing comes from Andrew Velarde as follows (reproduced with the permission of Tax Notes)
“Speakers Implore IRS for Non-U.S. Pension Reporting Relief,” Tax Notes Today International, August 22, 2024, by Andrew Velarde
Velarde – 22 Aug 2024 – Speakers Implore IRS for Non-U.S. Pension Reporting Relief
Those interested in more detail will find in in the following Appendixes:
Appendix A – SEAT Submission to IRS: Reporting of Non-U.S. Pensions, Investments and Gifts – June 26, 2024
Appendix B – Transcript of the hearing:
Appendix C – Audio of the hearing:
Appendix D – IRS Medic Discussion of the August 21, 2024
John Richardson – September 1, 2024
