Almost no U.S. Persons abroad properly report their foreign retirement accounts on Form 3520

Through a recent post at TaxProf Blog, I learned about the IRS’ Statistics of Income Bulletin. This finally gave me the lead on a figure in which I’d been interested for a long time: the number of Form 3520 filers. Unfortunately, the statistics are only released once every few years, and the next set aren’t scheduled for publication until December 2012. But you can see the figures for 1998, 2002, and 2006 here on the IRS website. The latest number: U.S. Persons filed a grand total of 1,952 Form 3520s and 3,819 Form 3520-As in 2006.

Most Homelanders think those filers are whales like Mitt Romney with “blind trusts” in the Cayman Islands. But as Phil Hodgen points out, other countries’ IRA-type accounts often meet the U.S. definition of “foreign trust” too. The IRS’ voluminous regulations on the subject make all sorts of exceptions to ensure that U.S. retirement accounts are not subject to onerous filing requirements, but offer no reasonable exceptions for non-U.S. retirement accounts. So, with the exception of Canadians with RRSPs (who file Form 8891 instead), you could easily end up paying more for an accountant to report your retirement contributions to the IRS than you contribute to your retirement plan. Of course, that only happens if you bother filing the stupid form. The number above suggests that very few do.

So what’s a decent percentage estimate of the compliance rate? Let’s start making a bunch of unrealistic assumptions in order to maximise the estimated rate:

  • Take the Global Migrant Origin Database estimate that there are two million Americans residing abroad (in reality, the State Department estimate of six million seems more likely to be correct).
  • Say one million of those reside in Canada and can all get by with just Form 8891 (in reality, many Canadians too should be Form 3520 filers, for example due to RDSPs).
  • Of the remaining million, say half are retirees living off of Social Security and have never worked in foreign countries, meaning that they have no foreign retirement plans either.
  • Of the remaining 500,000, say they’re all in households of one breadwinner who has a retirement account, and one non-breadwinning spouse and two kids who have never worked a day in their lives and thus don’t have retirement accounts (regardless that the U.S. labour force participation rate is in the mid-60s).
  • And of those 125,000 breadwinners, say half are for one reason or another exempt from participation in a foreign retirement plan due to a “totalization agreement” or the peculiarities of their employment situation
  • And of the remainder, say perhaps as many as half have plans that somehow escape the Form 3520 filing requirement (because, for example, their plans are PFICs and come under Form 8621 instead)

So even with this chain of dubiously skewed estimates, we’re still left with 30,000 to 60,000 Americans abroad who should be filing Form 3520. In otherwords, the upper bound for the Form 3520 compliance rate is about ten percent, assuming that every one of the filers recorded by the IRS is a U.S. Person abroad. If you make more reasonable estimates for the number of Americans abroad, the likelihood that they have a foreign retirement account, and the fact that the IRS statistics include Homeland filers as well, the Form 3520 compliance rate by U.S. Persons abroad rapidly starts to look like a rounding error.

To give an obvious example of this: the 2009 Statistics of Income Bulletin has a breakdown by country. Here in Hong Kong, there were a grand total of eight Form 3520-A filers in 2006, with total trust assets income of US$148,000. No breakdown was provided for Form 3520. Hong Kong is not a popular jurisdiction for onshore American whales to form trusts, due to the various restrictions in the Trustee Ordinance on what kinds of assets a trustee can hold. But there are tens of thousands of Americans in Hong Kong. Most are employees of large companies — not self-employed, students, nor stay-at-home spouses — and therefore have accounts either under the Mandatory Provident Fund or the Occupational Retirement Schemes Ordinance.

A cynic might look at this situation and decide that the U.S. government is getting a higher level of compliance than that to which it is morally entitled: none. Legislators of the countries where we live have decided time after time that these retirement plans should enjoy simplified reporting and tax treatment in order to encourage local people and immigrants of all nationalities to save for retirement. The 535 imperialist occupants of the U.S. Capitol should not be invading other countries, ignoring our democratically-enacted laws, and generally wreaking havoc with our carefully-designed systems of tax incentives.

Of course, the low level of Form 3520 compliance arises not from principled resistance to extraterritorial taxation, but rather from ignorance of the filing requirements — compounded by the IRS’s complete unwillingness to give straight answers about whether a given non-U.S. structure or account is indeed a “foreign trust”. Many American expats happily delude themselves into thinking that they are fully “IRS-compliant” by virtue of filing Forms 1040 and 2555. They come by the Isaac Brock Society or read our comments at other sites and wonder what paperwork burdens we extremists are complaining about. All I can say to them is that I hope they wise up about their obligations and get them in order (and take steps to end those obligations, where appropriate), rather than finding out too late when they’re being herded into the OVDI under threat of 35% failure-to-file fines.


18 thoughts on “Almost no U.S. Persons abroad properly report their foreign retirement accounts on Form 3520

  1. @Eric, nice post. One can also make a similar back-of-envelope estimate for the number of immigrants into the US who still hold retirement accounts in their previous countries and don’t file a 3520. The percentage is equally low.

  2. Pingback: Haven’t heard yet from the IRS on how to file foreign retirement accounts | American Expat

  3. @Eric,
    The Tax Free Savings Accounts (TFSA) and Registered Education Savings (RESP) plans are very popular in Canada and apparently are foreign trusts requiring 3520 reporting. So I would think the number of USCs in Canada that “should” be filing 3520 is quite high.

  4. I almost feel that pointing this all out about lack of compliance regarding forms 3520/3520A will only give the IRS more ammunition to fine expats (and renunciants). It will also give accountants a further excuse to charge even higher fees…it’s all extortion.

  5. Regarding Canadians and what our Finance Minister James Flaherty states regarding RDSPs, RESPs, TFSA, which require Forms 3520 and 3520A filing (foreign accounts to the US / not foreign to us in the country in which we live:

    Thank you for your correspondence of November 14 and 21, 2011 and January 4, 2012 regarding the taxation by the U.S. of income earned by dual Canadian-American citizens resident in Canada, as well as the requirement for these individuals to file tax and information reporting forms in the U.S. Please excuse the delay in replying.

    In your correspondence, you draw attention to financial interests held in Canadian deferred income arrangements, such as Registered Disability Savings Plans (RDSPs), Tax-Free Savings Accounts (TFSAs), and Registered Education Savings Plans (RESPs). While I cannot comment on the specifics of your situation, I would like to make the following general remarks.

    Canada and the U.S. have agreed in the Canada-United States Income Tax Convention to exempt from withholding tax dividends and interest paid to a trust, company, organization or other arrangement operated exclusively to administer or provide pension or retirement benefits, such as a Registered Retirement Savings Plan or a Registered Retirement Income Fund. Accordingly, when the above requirements are not met, dividends and interest are subject to income tax.

    Since an RDSP, a TFSA or an RESP can be set up to pursue financial objectives other than he exclusive provision of pension or retirement benefits, they do not meet the criterion set out above and, consequently, they do not receive an exemption from U.S. income tax under the Convention.

    Your concerns on this matter will be considered when the Convention is next open for renegotiation.

    Not being able to benefit from our country’s tax-savings plans is only one of the ways we are deemed second-class Canadians (or whatever other country’s citizenship we hold) by virtue of our extraneous US citizenship.

  6. @mona,

    I just can’t shoot the messenger (i.e., the professionals I have to hire to help me since I don’t have the knowledge / skills to help myself) for helping me comply with the draconian requirements of the IRS. I prefer to put the blame where its due — to the US Congress and to the IRS.

    For me, the professionals are the only people who are going to get me to “the other side” of all this absurdity, and I don’t consider it extortion — expensive yes, extortion no. That’s not to say that I in any way think we should have to use such professionals to comply with the US IRS. I am somewhat thankful for their education, their expertise and their help. I am also not saying that such professionals are all the same quality. There will be a portion of such ready to exploit us and our situations.

    We should look wisely at how we are paying or not paying from our retirement funds or any other savings for the help we need. The extortioners, in my mind, reside in Congress and at the IRS who does not pay attention to even the TSA, let alone give taxpayers outside the US any kind of useful service.

  7. @Calgary, believe me, I agree with you that it’s ultimately Congress’s and the IRS’s fault that we’re in the mess we’re in. But there’s an industry in all this.

    I’m cynical enough to believe that the tax attorneys, financial advisers and accountants would prefer the tax situation to remain as it is rather than be reformed, as they thrive on our dependency. Thus, I’ve got to disagree that they ultimately have our best interests at heart.

    And I also am outraged that we are effectively barred from our residence country’s tax-saving plans, thus making us second-class citizens both of US and where we live.

  8. Hi, monalisa.

    I hear you but I won’t paint all tax attorneys, financial advisors and cross-border accountants with the same brush — exactly what the US is doing to all of us when they paint us all tax evaders and traitors.

    I figure if I’m going to say that the ones I have chosen do not have my best interests in heart, then I’d better figure out how to do everything myself / figure out how to not have any outrageous penalties assessed. For me, I know I cannot do that, so I need them. I trust the ones I have chosen and I will pay dearly. I don’t like it; I don’t think it is right that we have to do this (especially since many do not have any savings to draw from for this). If we are required to comply with the US for $0.00 or little actually owed to the US, we should also be provided an easy, non-exorbitant method to do so. Or, give us what is the true meaning of an amnesty and let us out of jail!!

  9. When I first read “amnesty” I felt good. Then I realize that was a trap. Now I can’t live without US CPAs and Tax Lawyers. And I also can’t sleep at night. I still don’t know what I should do and what may be coming my way. And I am tired of asking because the answers change. Have you all read Kafka?

  10. @Calgary, I agree that my particular accountant has probably protected me from life altering penalties as they recommended a different sort of voluntary disclosure from the dreaded OVDI. They also believe I can avoid having to use 3520/3520A for my ISAs and pension plan. But I also realise that she may well be on the more aggressive side and more willing to take risks than some of the more cautious ones. She makes strong arguments but I’m all too aware that at some point the IRS may decide that they disagree with her.

    I don’t know how expensive she is compared to others but considering that I had a large number of mutual fund holdings with reinvested dividends, I believe she has actually been very fair about what she’s charging for the dreaded PFIC calculations. The frustrating part is that I still have no idea what they’re going to charge me for the 2011 tax return but they have admitted that it’s going to be substantially higher than last year; so I’m guessing that they could easily charge me several thousand dollars just for this year’s tax return alone.

    I will want to stick with them until I’m safely through the statute of limitations which could be anywhere between late 2015 and mid 2019, depending on the issue. I need to know they could represent me in case of an audit which is probably more likely than average because I had so many PFICs and over 25 accounts, so they may want to audit my FBARs as well, as I sent the Fincen a simplified Fbar due to having over 25 accounts.

    They’re more likely to come back with questions, especially as I had enough assets to need to also file the dreaded 8938.

  11. Yes, monalisa, it’s all insane. Multiply by four in my family who need to renounce to get our Canadian lives back, one of whom is denied that right — or I am denied that right for him. My only link to my own sanity in all this is Isaac Brock and the professionals I have chosen to help me. And, for me too, unfortunately 8938 and that additional expense applies for me this year and next (which will hopefully be MY last year to go through this).

  12. @Calgary, yes, it is all insane. I believe they were more expensive than average but with everything happening, I’ve noticed that other firms are quickly catching up. I’m guessing that even from next year (when I will have consolidated and moved into compliant investments) that I’ll still be looking at a minimum of $2,000 and probably more likely $3,000-4000 in annual accounting fees.

    Several years ago, I could have probably gotten down to under $1,000 but I believe that unless you’re referree through a friend that $2,000 is more likely as an annual base (if 8938 also has to be submitted).

    I am hoping I’ll be able to afford ongoing compliance costs but have decided that if it’s going to cost me more thsn $5,000 per annum, that I’m simply not going to be able to afford it. I know my family will be upset but I need to bd able to live my life.

  13. Looking back, I regret that I didn’t get UK citizenship and relinquish when I could easily have done so fifteen years ago, before I’d amassed substantial assets. I wouldn’t be facing all the problems I currently face.

    I also regret that I complicated my life unnecessarily from buying non-US mutual funds and tax-free accounts where I live…wish I had just stuck to a simple checking, savings account, and a CD. What with two bear markets and all these compliance issues, I’m no better off having invested.

    Also would have never bothered with a personal pension plan either. Far too many complications.

  14. @iamquincyi – As good Canadian’s, according the Canadian Federal Government, my wife and I both have had the TFSA and we have two RESP. I closed my TFSA to save on reporting and of course my name is not on my Wife’s account so she doesn’t report on it.

    Related to Eric’s post I just found out that I need to include the 3520 and 3520-A for both RESPs on the 1040, really? Two request in the mail the same day asking for the same thing for different accounts. So I had my US tax prepare just put all the forms together again and send it off. I’ll probably get hassled for doing that but there instructions were just to vague to understand. On top of that the phone numbers they tell you to call don’t work from Canada. So my strategy is simple, give them all the forms and let them figure it out.

    It’s interesting that they would want the 3520 and 3520-A attached to the 1040 when the date to get in those forms is April 16th. So you have to send them in to make the April deadline or you get fined, pottentialy, and then attach them to the 1040. What is their drug of choice that clouds their brains on this one?

    Anyway, it won’t matter since March 7/12 was the day I renounced so that’s all I have to report on for 2012 tax year.

  15. @all, here is an article that talks about the pitfalls for the new wave of those being induced to come to Canada to work (from the US).
    ‘Taxes create cross-border issues
    Do research to avoid fines, experts urge’

    By Derek Sankey, For The Calgary Herald May 28, 2012
    …….”RRSPs, TFSAs and other investments are all subject to taxes for U.S. citizens, so Berg advises his U.S. clients not to buy into those investment vehicles while working in Canada.

    It’s up to the U.S. workers to keep abreast of what returns need to filed, the costs associated with them and the timing of each one, but it ultimately becomes a problem for their Canadian employers, too.”……….

    Great, so, now we’ve got a whole new wave of people who’ll fall into the potential penalty pit.

    I’d like to hear more about the problem from the point of view of Canadian employers – because if they add their voices of complaint to the Canadian feds about this, it will continue to underscore the problems with extra-territorial taxation – and not just for those directly deemed to have a US tax obligation – but for all Canadians.

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