¶ 4301
Overview
Scope of the chapter. This chapter addresses the information returns that United States persons must file in respect of protective structures, particularly those with foreign elements. It covers the foreign trust returns required by section 6048, the Report of Foreign Bank and Financial Accounts, the statement of specified foreign financial assets required by section 6038D, the returns for foreign corporations, partnerships and disregarded entities and for transfers to them, the annual report for passive foreign investment companies, the penalties for failure to file and their assessability, the extended period of limitations, reasonable cause, the procedures for remedying past failures, and an annual reporting calendar for protective structures.
Why reporting is central. The information returns create no tax by themselves, but the penalties for failing to file them are large, often exceeding any tax at stake, and the period for assessing tax on the related return remains open until the information is furnished. A protective structure that is fully reported is lawful and defensible. A structure that is not reported exposes the client to penalties measured by the value of the trust or account, to an open-ended limitations period, and, where the failure is willful, to criminal prosecution. Unreported structures also undermine the asset protection case: a creditor who shows that a structure was concealed from the government will present it as concealed from creditors as well, and the failure to report prevents the client from certifying compliance if the client later expatriates (see infra ch. 46).
The returns in outline. A United States person who settles and owns a foreign trust holding foreign accounts and a foreign holding company will ordinarily file, each year, a Form 3520 reporting transfers and the person's ownership, a Form 3520-A filed by the trust or a substitute filed by the owner, an FBAR for accounts over which the person has a financial interest or signature authority, a Form 8938 for specified foreign financial assets, and Forms 5471, 8865 or 8858 for foreign entities, together with Form 8621 for any PFIC interests. The obligations overlap but are not coextensive, and each has its own threshold, deadline and penalty.
Relation to other chapters. The tax character of protective structures, which determines who files, is addressed in chapter 42 (see supra ch. 42). Automatic exchange of information under FATCA and CRS, through which the government learns of foreign accounts independently of the taxpayer's own filings, is addressed in chapter 44 (see infra ch. 44). The privilege against self-incrimination and records required to be kept is addressed in chapter 37 (see supra ¶ 3740).
Development of the regime. The present foreign trust reporting rules date from the Small Business Job Protection Act of 1996, which enacted section 6048 in its current form and the section 6677 penalty, effective for events after August 20, 1996 and for owners' tax years beginning after 1995. Pub. L. No. 104-188, § 1901(d), 110 Stat. 1755. The Hiring Incentives to Restore Employment Act of 2010 added Form 8938, the $10,000 minimum penalty under section 6677, the requirement that the owner submit information, the extended limitations period for the whole return, and the rules treating loans and use of trust property as distributions. Pub. L. No. 111-147, §§ 511, 513, 531–535, 124 Stat. 71 (2010). The same legislation enacted FATCA (see infra ch. 44). Treasury's administrative guidance on foreign trust reporting remains Notice 97-34, 1997-25 I.R.B. 22, which states that "[u]ntil such regulations are issued, taxpayers must comply with the guidance set forth in this notice." Id. at 22. Structures settled before 2010 under the earlier rules have been subject to the expanded obligations since that year.