The Internal Revenue Service is always on the lookout for taxpayers who fail to comply with tax laws, and it maintains a number of Large Business and International (LB&I) campaigns to address tax avoidance through unreported income or undisclosed assets. Foreign investments are an area that the IRS commonly examines, and one issue that has been highlighted is the holding of assets in trusts outside the United States. Failing to file the proper forms or making errors when reporting assets in foreign trusts can lead to tax audits and significant penalties.

Penalties for Errors in Form 3520 and 3520-A

There are a variety of reporting requirements that apply for U.S. citizens and companies or estates in the United States that are owners or beneficiaries of foreign trusts. The term “foreign trust” is broadly interpreted to include any trust that is not considered a domestic trust. Domestic trusts are trusts that are primarily controlled by people or entities in the United States and are supervised by a U.S. court. There is a lack of clarity concerning some financial accounts that may be treated by the IRS as a trust.

U.S. taxpayers who are considered the owner of a foreign trust or who engage in transactions with foreign trusts are required to file Form 3520 to report these transactions. These transactions may include creating a trust, transferring assets to a trust, receiving a distribution from a trust, or making or receiving a loan with a trust.

U.S. citizens and residents are required to meet a variety of tax obligations, and in some cases, they may continue to owe taxes even if they no longer live in the United States. For those who have not met their requirements, the Internal Revenue Service (IRS) may be looking to collect expatriation taxes that are owed, and it may perform audits on individuals who are not in compliance with their tax obligations.

What Is the Expatriation Tax?

When moving to another country, adult citizens of the United States can relinquish their citizenship, and non-citizens may terminate their resident status in the United States. For those who expatriated after June 17, 2008, an expatriation tax will apply if they meet one of the following criteria:

The employment laws in California have gone through a number of major changes over the past year. Assembly Bill 5 (AB5), which went into effect on January 1, 2020, put in place new rules for worker classification, specifying when a person may be considered an employee or an independent contractor. However, there has been some confusion about whether certain workers are exempt from these rules. A new bill, AB2257, was approved by California Governor Gavin Newsom on September 4, 2020, superseding, amending, and adding further complexity to the worker classification issue.

Exemptions Under AB2257

AB5 specified, with certain exceptions, that a three-part test, known as the “ABC test,” should be used to determine whether a worker should be classified as an employee or as an independent contractor. This test states that for a person to be considered an independent contractor, he or she must 1) be free from the control and direction of the company that hired him or her when performing his or her duties, 2) perform work that is not in the usual course of the hiring company’s business, and 3) regularly be engaged in a trade or occupation that has been established independently.

Employers and employees throughout the United States have been affected by the COVID-19 pandemic. Many businesses have been forced to close, reduce hours in operation, or lay off employees. While some programs have been implemented to provide relief to both businesses and individual taxpayers, many people and businesses continue to struggle financially. In response to these concerns, a recent presidential order has been issued that will allow employers to defer certain payroll taxes.

Payroll Tax Deferral Available from September through December of 2020

On August 8, 2020, President Trump issued a Presidential Memorandum, “Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic.” This order allows employers to defer the withholding of employees’ share of Social Security (FICA) taxes on wages paid between September 1, 2020, and December 31, 2020. Deferrals are available for any employee who earns less than $4,000 on a biweekly basis before taxes are withheld.

Over the past few years, California’s employment laws have been in flux due to court decisions and legislation that have affected how workers are classified. Specifically, Assembly Bill 5 (AB5) has required some companies to classify their workers as employees rather than independent contractors, which will allow workers to receive a minimum wage and benefits. However, companies such as Uber and Lyft have fought against these requirements, and voters will be able to decide whether to implement a measure in the upcoming election to determine whether certain types of workers will receive an exemption from the requirements put in place by AB5.

NOTE: AB5 has very recently been renumbered as AB2257 and clarifies current definitions of employee versus independent contractor and enumerates a number of exemptions for certain industries. Prop 22 was placed on the ballot prior to this change in numbering and therefore refers to the old AB5.