--- oa_review_kit: v1 guide_slug: us-foreign-trust-reporting guide_version: us-foreign-trust-reporting@2026-05-31T18:20:07.977Z archetype: other --- # Review kit: US Foreign Trust Reporting Thank you for reviewing this Guide. This kit is one file with three parts: how to use it, an interview prompt for your AI, and the Guide itself. ## How to use this kit (3 steps, about 15 minutes) 1. Open the AI you already use (ChatGPT, Claude, Gemini, anything that reads markdown) and paste in everything from "INTERVIEW PROMPT" below, including the Guide at the end. 2. Your AI interviews you like a colleague, one question at a time. Just talk: war stories, walk-throughs, the mistakes you catch. No writing required. 3. Your AI writes your answers up as a single markdown file. Hand it back at openaccountants.com/skills/us-foreign-trust-reporting/handback (also linked from the Guide page: "Hand back your file"). What you added is published under your name and credential. If your AI cannot produce the exact output format, hand back whatever you have: a revised Guide file, a worksheet, or plain notes. We take those too, and a person reviews them by hand. The format below is the one we can apply straight away. --- # INTERVIEW PROMPT (paste from here down into your AI) You are interviewing a practising accountant about how they actually do the work covered by the attached Guide ("US Foreign Trust Reporting", slug `us-foreign-trust-reporting`). Interview them like a colleague doing a handover. Do not lecture. Ask ONE question at a time and wait for the answer. Chase war stories and specifics: what kind of client, which portal step, how big the penalty was. The rates, thresholds, and citations are our job; we refresh those from primary sources. Capture ONLY what is NOT derivable from law: - order of operations, and what a wrong order corrupts - what to ask a client before computing anything - what to assume when a fact is unknown, and how it gets flagged - the most-missed traps, with penalty size and who falls in - how the portal or filing channel actually behaves - what has to reconcile before anyone signs - when to refuse the work and hand it to a human specialist If the accountant corrects a rate, threshold, or deadline in the Guide along the way, record it in the FACT CORRECTIONS table, but do not steer the interview toward numbers. ## Questions to work through Ask these in order, one at a time. Skip any the accountant has already covered; follow up where a story has specifics worth pinning down. Each question is tagged with the method slot(s) it feeds. 1. [sequence] Walk me through the last one of these you did for a real client, start to finish. What did you open first, and why that order? 2. [intake_questions] A new client sits down for this work. What are your first five questions before you touch a number? 3. [evidence] Which documents do you insist on seeing, and which do you take the client's word for? 4. [trap] When you review this work drafted by someone else, what mistake do you catch most often? 5. [conservative_default] When a key fact is unknowable at draft time, what do you assume, and how do you flag it? 6. [judgment_rule] When the law allows two routes, how do you actually pick, and what do you write down about the choice? 7. [cross_check] Before you sign, what has to reconcile with what, and how close is close enough? 8. [filing_mechanics] Walk me through the actual submission: the portal steps, the order things must happen in, what locks, what you can't undo. 9. [scope_gate] Which clients do you refuse or refer to a specialist for this work? What makes you stop? 10. [unsettled_law] Anything here you deliberately won't finalise right now because the rules are moving? 11. [handback_protocol] What exactly do you hand over at the end? What's in your working paper? ## Method slots (for tagging the write-up) - `scope_gate` (Scope gate and refusals): when to stop and send the client to a human - `sequence` (Order of operations): what order to do things in, and what a wrong order corrupts - `intake_questions` (Client intake questions): what to ask a client before computing - `evidence` (Documents and evidence): which documents to insist on, and what is draft-grade vs file-grade - `judgment_rule` (Judgment rules): how a practitioner actually picks when the law allows two routes - `conservative_default` (Conservative defaults): what to assume when a fact is unknowable at draft time - `trap` (Traps and most-missed items): the mistakes everyone makes, what they cost, and who falls in - `filing_mechanics` (Portal and filing mechanics): how submission actually works: channel, order, what locks - `cross_check` (Cross-checks before signing): what has to reconcile with what before delivery, and how close is close enough - `pattern_library` (Pattern library): how messy real-world data (bank lines, payout platforms) maps to tax categories - `edge_case` (Edge-case playbook): the client situations that change the method, not just the numbers - `unsettled_law` (Unsettled-law flags): what not to finalise right now, and why - `handback_protocol` (Hand-back protocol): what the finished working paper contains and who reviews it ## Output format: oa-handback v1 When the interview is done, write the answers up as ONE markdown file in exactly this shape. Fill in the reviewer's real name, credential, and email (ask for them at the end if they have not come up). Every method block gets a `### [method:]` heading where `` is one of the 13 slot ids above. Keep `guide_slug` and `guide_version` exactly as given. Omit any section the interview produced nothing for, but keep the headings that remain exactly as shown. The `fact_key` column may be left blank when unknown. ```markdown --- oa_handback: v1 guide_slug: us-foreign-trust-reporting guide_version: us-foreign-trust-reporting@2026-05-31T18:20:07.977Z reviewer_name: reviewer_credential: # free text: CPA, EA, ACCA, Steuerberater... reviewer_email: verdict: --- ## METHOD ### [method:filing_mechanics] ### [method:intake_questions] - - ... ## FACT CORRECTIONS | fact_key | current | correct | source | |---|---|---|---| | | | | | ## FLAGS - [unsettled] - [refer] ## NOTES ``` If for any reason you cannot produce this exact format, output the accountant's corrections and methods as clear plain notes instead. The hand-back page accepts plain notes and revised Guide files too; this format is an optimization, never a gate. --- # THE GUIDE UNDER REVIEW --- name: us-foreign-trust-reporting description: "US taxation and reporting of foreign trusts for US persons: the court/control tests (IRC §7701), grantor-trust ownership under §671–679 (especially §679), the throwback / accumulation-distribution regime (§665–668) and its interest charge, and Forms 3520 and 3520-A with their penalties. Produces a working paper and a reviewer brief — not a filed return. MUST load alongside cross-border-tax-workflow-base." jurisdiction: US domain: international tax_year: 2025 --- # us-foreign-trust-reporting ## What this file is This is a **topic content skill**. It loads on top of `cross-border-tax-workflow-base` and assumes the **cross-border-tax-router has already run** and sequenced the engagement. It carries the US foreign-trust rules only; the workflow architecture, intake map, sequenced-plan contract, and mandatory human hand-off live in the base. **Characterize the trust FIRST.** Before any distribution is taxed, any gain on a sale is computed, or any form is selected, this skill determines (1) whether the trust is *foreign*, and (2) whether it is a *grantor* (owned) or *non-grantor* trust as to the US person. Every downstream number depends on that answer. A distribution from a grantor trust the US person already owns is not a taxable distribution at all; the same cash from a non-grantor trust can carry throwback tax plus an interest charge. Do not compute the consequence before you have fixed the character. **Currency.** Provisions cited are current US federal law (IRC + Forms 3520 / 3520-A). Penalty *amounts* below are the long-standing statutory figures; confirm current indexing and any active penalty-relief procedure for the filing year. This output is a **working paper**, never a filed return. Foreign-trust positions carry some of the highest penalty exposure in the Code (§6677, §6048). The foreign-country (e.g. Australian) treatment is **out of scope** and is deferred to a local accountant — see the flash points. ## Layer A — Reference layer ### A1. Is the trust FOREIGN? (the two "courts" tests) - **Foreign vs domestic trust determination** — A trust is a **US (domestic) trust only if it passes BOTH** of the following. Fail either one and it is a **foreign trust**. COURT TEST: A court within the US is able to exercise primary supervision over the administration of the trust? NO → FOREIGN TRUST. YES → proceed to control test. CONTROL TEST: One or more US persons have authority to control all substantial decisions of the trust? NO → FOREIGN TRUST. YES → DOMESTIC TRUST. "All substantial decisions" is read strictly (distributions, who can benefit, investment, removal/replacement of trustee, termination, litigation). A single substantial decision controlled by a non-US person taints the control test. A foreign trustee, foreign situs, or foreign-law governing instrument typically fails the court test. **Conservative default:** if either test is not clearly met on the documents, treat the trust as **FOREIGN** and proceed under this skill. _(IRC §7701(a)(30)(E), §7701(a)(31)(B); §7701(a)(30)(E)(i) court test; §7701(a)(30)(E)(ii) control test)_ ### A2. GRANTOR vs NON-GRANTOR (is a US person the OWNER?) — §671–679 - **Grantor vs non-grantor determination** — If a US person is treated as the **owner** of all or part of the trust under the grantor-trust rules, that person is taxed **currently** on the trust's income (income, deductions, credits flow through — §671), regardless of whether anything is distributed. Run these in order: §673–678 ordinary grantor-trust triggers: Retained reversion, power to control beneficial enjoyment, certain administrative powers, revocability, retained income interest, or a power held by a person to vest corpus/income in himself? YES → US person is OWNER of that portion (GRANTOR TRUST). NO → proceed to §679. §679 — the foreign-trust-specific owner rule (the decisive one offshore): A US person (directly or indirectly) TRANSFERRED property to a FOREIGN trust that has (or may have) a US BENEFICIARY? YES → US transferor is treated as OWNER of the transferred portion → GRANTOR TRUST as to that US person. NO → NON-GRANTOR FOREIGN TRUST (throwback regime applies to US-beneficiary distributions — see A3). §679 notes: - The "US beneficiary" condition is read broadly: if **any** trust terms could permit a US person to benefit, or amounts could be accumulated for a future US beneficiary, the condition is generally treated as met. - §679 can apply to transfers made *before* the transferor became a US person but within the look-back window tied to US residency (the 5-year pre-residency rule) — flag any transfer near an immigration date. - A transfer for full fair-market-value consideration is generally outside §679; a gratuitous or below-value transfer is in. _(IRC §671; §673–678; §679)_ ### A3. NON-GRANTOR foreign trust → US-beneficiary DISTRIBUTIONS: throwback (§665–668) - **Throwback / accumulation-distribution regime** — A US person who is a beneficiary (not owner) of a foreign non-grantor trust is taxed on distributions under the **throwback / accumulation-distribution regime**: - **DNI first.** A current-year distribution carries out distributable net income (DNI) and is taxed to the beneficiary at ordinary rates (character preserved). - **UNI / accumulation distribution (§665).** Income a foreign trust **earned in a prior year but did not distribute** becomes **undistributed net income (UNI)**. A distribution exceeding current DNI is an **accumulation distribution** that pulls UNI out of prior years ("throwback"). - **Throwback tax (§666–667).** The thrown-back UNI is taxed as if received in the earlier years (averaging mechanics), and — critically — **long-term capital gains accumulated in a foreign trust lose their preferential character** and come out as ordinary income. - **§668 interest charge.** A non-deductible **interest charge** is imposed on the deferred tax, compounding for **every year the income sat undistributed**. For a trust that accumulated for decades, the interest charge alone can approach or exceed the distribution — this is why long-accumulating foreign trusts are punitive to US beneficiaries. _(IRC §665; §666–667; §668)_ - **Default method vs actual method** — **Actual (exact) method** — requires the trust's complete year-by-year DNI/UNI records to allocate UNI to specific accumulation years; usually the lower number, but needs reliable historical accounting. **Default method (Form 3520 instructions)** — used when the year-by-year history is unavailable. It synthesizes an average accumulation period and applies the highest rate, generally producing a **higher** tax and interest charge. **Conservative default:** if the trust cannot produce reliable year-by-year UNI records, assume the **default method** applies and flag the UNI exposure as material and probably understated by any back-of-envelope estimate. _(Form 3520 instructions)_ ### A4. Reporting forms **Reporting forms table** _(§6048(a)/(c); §6048(b))_ | Form | Who / when | Covers | | --- | --- | --- | | **Form 3520** (§6048(a)/(c)) | The US person | Transfers TO a foreign trust; distributions FROM a foreign trust; ownership of a foreign trust; AND large gifts/bequests from foreign persons/estates. | | **Form 3520-A** (§6048(b)) | The foreign trust (the **US owner** is responsible for ensuring it is filed; owner files a substitute if the trust will not) | Annual information return of a foreign trust **with a US owner** — income statement, balance sheet, and Foreign Grantor Trust Owner/Beneficiary statements to the US persons. | - **Form 3520 penalty** — Greater of $10,000 or 35% USD or percent of gross value (of the gross value of the property transferred / distribution received (5% for failure to report ownership), per failure) _(§6677)_ - **Form 3520-A penalty** — Greater of $10,000 or 5% USD or percent of gross value (of the gross value of the trust's assets treated as owned by the US person, per month of non-compliance) _(§6677)_ - **Large foreign gift/bequest under-reporting penalty** — 5% per month (capped) percent per month (separate penalty for under-reporting large foreign gifts/bequests) _(§6677)_ - **Reasonable cause defense** — **Reasonable cause** is a defense (§6677(d)); recent IRS practice has moved toward **first-time-abatement-style relief** and away from automatic systemic assessment on late-filed 3520/3520-A — confirm the current procedure and assert reasonable cause affirmatively where the facts support it. _(§6677(d))_ ## Layer B — Executable layer (trust facts → owner → treatment → forms) Run top to bottom. Stop and flag at any unknown — do not assume favorably. 1. **Gather trust facts.** Instrument, governing law, situs, trustee nationality/residence, who controls each substantial decision, settlor, beneficiary class, funding history (who transferred what, when, for what consideration), and year-by-year income/distribution records if any. 2. **FOREIGN test (A1).** Apply court + control. If either fails → foreign. If either is unclear → treat as foreign. 3. **OWNER test (A2).** Apply §673–678, then **§679**. Decide grantor vs non-grantor **as to each relevant US person**. A trust can be a grantor trust as to one US person and not another. 4. **Branch:** - **Grantor (US owner):** trust income is reported on the **owner's** US return currently (Schedule B / relevant schedules). File **Form 3520-A** (or substitute) and **Form 3520**. Distributions to the owner are generally **non-taxable returns of owned assets** — characterize the trust before calling any cash a "distribution." - **Non-grantor + US-beneficiary distribution:** compute DNI; identify any accumulation distribution; run throwback (A3) under actual method if records allow, else default method; add the **§668 interest charge**. Report on **Form 3520**. - **No US owner, no distribution this year:** report transfers/ownership as applicable on **Form 3520**; UNI continues to accrue silently — note future exposure. 5. **SALE overlay (see flash point).** Determine the **tax owner at the moment of sale** from step 3, *before* computing gain. Grantor analysis first: if a US person owns the trust under §679, gain on the trust selling an asset is **that US person's gain currently**. If non-grantor, gain stays in the trust, swells DNI/UNI, and is taxed to a US beneficiary only on distribution (with throwback on any accumulated portion). 6. **Residency overlay.** If the US person's status is changing (expatriation, becoming/ceasing to be a US person), the **router's sequencing rule** governs order of operations and you must **cross-reference `us-expatriation-exit-tax`** — a §877A mark-to-market and the §679 ownership question can collide. 7. **Assemble working paper + reviewer brief** per the base contract. ## Audit flash points ⚑ AUDIT FLASH POINT — §679 deemed ownership. A US person who transferred property to a foreign trust that *could* benefit any US person is treated as the **owner** even with no distribution and no retained control. Check funding history and any transfer within the pre-residency window. Missing this turns a "non-grantor" analysis into a current-tax-and-3520-A filing obligation. ⚑ AUDIT FLASH POINT — throwback interest on long-accumulated UNI. For a foreign non-grantor trust that accumulated income for many years, the **§668 interest charge** compounds across every accumulation year and capital gains lose their character. The interest can rival the distribution itself. If year-by-year records are missing, assume the **default method** and treat the exposure as large and under-estimated. ⚑ AUDIT FLASH POINT — 3520 / 3520-A penalties and reasonable cause. Penalties run to **35%** (3520) and **5%/month** (3520-A) of trust value. File on time; if late, assert **reasonable cause (§6677(d))** affirmatively and check the current IRS penalty-relief / first-time-abatement posture before assuming an automatic penalty. ⚑ AUDIT FLASH POINT — US vs foreign characterization mismatch. A trust the US treats as a foreign **non-grantor** trust may be treated entirely differently abroad. **Australian discretionary and unit trusts** are common and are **typically foreign non-grantor trusts to the US unless §679 applies** — but their Australian treatment (e.g. trust distributions, CGT, present entitlement) does **not** track the US analysis. The two systems can each tax the same economics differently and double-tax relief is not automatic. The Australian side **requires a local accountant** — do not opine on it. ⚑ AUDIT FLASH POINT — selling trust assets vs distributing then selling: order matters. Whether the trust sells the asset (gain lands in the trust → DNI/UNI → throwback to a US beneficiary later) or distributes the asset first and the US person sells (gain on the beneficiary's own return, possibly with stepped basis questions) produces **materially different US tax**. Fix the **tax owner at the instant of sale** under the §679/grantor analysis **before** modelling the sale, and sequence per the router. ## Topic self-checks - [ ] Court test AND control test both applied; foreign/domestic conclusion stated (defaulted to FOREIGN where unclear). - [ ] §673–678 screened, then **§679** screened against full funding history and any pre-residency transfers; grantor vs non-grantor fixed **per US person**. - [ ] If grantor: owner's current income inclusion handled; **3520-A** (or substitute) and **3520** identified. - [ ] If non-grantor distribution: DNI vs accumulation distribution computed; throwback run; **§668 interest charge** included; actual vs **default** method chosen and justified. - [ ] UNI / records availability assessed; default method assumed where history missing. - [ ] **Form 3520** transfer/distribution/gift items captured; penalties and reasonable-cause posture noted. - [ ] **Sale overlay:** tax owner at moment of sale fixed before any gain computed. - [ ] **Residency overlay:** `us-expatriation-exit-tax` cross-referenced and router sequencing applied where status is changing. - [ ] Australian (or other foreign-country) treatment **explicitly deferred** to a local accountant. - [ ] Output labelled a working paper; no human sign-off claimed. ## Disclaimer Provides computational and interpretive guidance on US foreign-trust taxation and Forms 3520/3520-A only. Not tax or legal advice and not a filed return. Trust characterization and throwback turn on the trust instrument and history and require professional judgement; the foreign-country treatment requires a local accountant. Have outputs reviewed and signed by a qualified, licensed accountant before acting. Research-verified (tier 2) pending credentialed sign-off.