Reporting Foreign Trusts and Gifts: what is Form 3520

Individuals who are citizens or residents of the United States, as well as executors handling the estates of deceased U.S. individuals, are required to file Form 3520 to report various transactions involving foreign trusts. This includes disclosing ownership of foreign trusts following the regulations outlined in sections Internal Revenue Code 671 through 679. Additionally, it is necessary to report the receipt of substantial gifts or bequests from specific foreign individuals.

It is important to note that a separate Form 3520 must be filed for each transaction involving a foreign trust.

Typically, a U.S. individual's Form 3520 is expected to be submitted by the 15th day of the 4th month after the conclusion of their tax year for income tax purposes. However, if a U.S. individual is granted an extension to file their income tax return, they should ensure that Form 3520 is filed no later than the 15th day of the 10th month following the end of their tax year. It's important to note that this deadline may vary and is not linked to the due date of the individual's income tax return.

Form 3520 and 3520-A

Form 3520, also referred to as the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is a requirement for U.S. taxpayers who receive or may receive income from a trust-based outside the United States or a foreign inheritance. The need for disclosure depends on various factors, including the asset size. Unlike a typical tax return, Form 3520 serves as an information return, and there is no requirement to make any payments to the IRS when submitting it.

Form 3520-A is required by the government from individuals who oversee foreign grantor trusts that have identified U.S. taxpayer beneficiaries.  Form 3520-A is somewhat less frequently required than Form 3520.

The requirements and contents of both forms can be quite complex, so it is highly recommended to seek assistance from professionals who have extensive experience in dealing with the IRS. Their expertise will ensure that you navigate the process smoothly and accurately.

Who Must File Form 3520?

If any of the following situations apply to you, it is necessary to file Form 3520:

• You are the responsible party responsible for reporting a reportable event that occurred during the current tax year. You are a U.S. individual who exchanged property (including cash) for an obligation with a related foreign trust or a person related to the trust.
  
  
• You currently hold a qualified obligation from that trust that is outstanding.
  
  
• If you fall under the category of being a U.S. person who, in the current tax year, is considered the owner of any portion of the assets of a foreign trust under the regulations specified in sections 671 through 679, the terms "U.S. person" and "owner" will be further explained later in this article.
  
  
• You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who received, directly or indirectly, a distribution from a foreign trust during the current tax year; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year you or a U.S. person related to you received (1) a loan of cash or marketable securities (including an extension of credit) directly or indirectly from such foreign trust, or (2) the uncompensated use of trust property; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year, such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you.
  
  

You are a U.S. person who, during the current tax year, received either:

• 1. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

  2. More than the section 6039F threshold amount from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts. The threshold amount is available at IRS.gov/Newsroom/Inflation-Adjusted-Tax-Items-by-Tax-Year. Select the applicable tax year news release, then click on the Rev. Proc. link and search for section 6039F to see the threshold amount under Notice of Large Gifts Received from Foreign Persons.

   

  What penalties will I have if I don't pay on time?

  A penalty applies if this form is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).
  
  

• 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
  
  
• 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
  
  
• 5% of the gross value of the portion of the foreign trust's assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679), if the foreign trust (a) fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information.

How we can help

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