Accounts that have to be reported as foreign trusts on Form 3520 and 3520A are penalty machines for the IRS. This is one of the most commonly penalized international tax forms that the IRS requires, and the penalties tend to start at $10K USD, regardless of how small the account is. In brief, any account that gives you tax benefits in your home country (the most common is deferred investment income), it is probably considered a foreign trust. Who owns the trust? The person who funded it, who is generally called the ‘grantor’. What if your corporation is the trustee or beneficiary? This doesn’t really matter because the IRS looks at something called ‘actuarial interest’, which is to say that if there aren’t any explicit restrictions for you to remove funds, the IRS will look through the whole chain of ownership and entities to see if you can make a decision to take money or property out. It also doesn’t typically matter if other people are beneficiaries, as long as you funded the account that is considered the trust. The most common examples of accounts that would be subject to Form 3520 and 3520A reporting are as follows:

A) Australian superannuation funds (yes, industry funds and self-managed are all arguably subject to these rules)

B) United Kingdom Individual Savings Accounts (ISAs) and Self-Invested Pension Plans (SIPPs)

C) New Zealand Kiwisaver accounts

D) Singapore, Hong Kong, and India Provident Funds

E) Canadian Tax-Free Savings Accounts

If we are preparing US tax returns for any years where you owned one or more of these types of accounts, please have annual statements ready for our review. Because foreign trusts with a US grantor are considered disregarded entities, any investments the accounts hold are taxable in the same way as if you held them in a regular investment account. The take home here is: Abandon any ideas about fairness, logic, or reason, when it comes to foreign grantor trusts. You absolutely cannot expect the rules to be intuitive, and we need to have good records from you to mitigate your risks of nonreporting and the resulting penalties.