Forms 3520 and 3520-A: What You Need to Know
If you own an interest in a foreign trust, you may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, annually with the Internal Revenue Service.
What Must Be Reported
Form 3520 reports information about a foreign trust, such as the name and address of the U.S. agent of the trust, or, if none, the name and address of each beneficiary of the trust. Form 3520 also reports transfers of property by U.S. persons to the foreign trust, and distributions by the foreign trust to U.S. persons, during the tax year. The duty to file Form 3520 is upon the U.S. owner of the foreign trust.
Wholly unrelated to foreign trusts, a U.S. person is also required to report on Form 3520 receipt of (1) more than $100,000 from a nonresident alien individual or a foreign estate during the tax year treated as gifts or bequests rather than taxable income, or (2) more than $16,388 from foreign corporations or foreign partnerships during the tax year treated as gifts rather than taxable income.
Form 3520-A reports the name, address, and employer identification number of the foreign trust, and the name, address, and identification number of the U.S. agent of the trust. The trustee must complete Form 3520-A and send it to each U.S. person beneficiary of the trust, along with a Foreign Grantor Trust Owner’s Statement, a Statement of Foreign Trust Income Attributable to U.S. Owner, and a Foreign Grantor Trust Beneficiary Statement.
The duty to file Form 3520-A is upon the trustee of the foreign trust. But if the trustee fails to file Form 3520-A, then the U.S. beneficiary of the foreign is required to file a “substitute” Form 3520-A for the foreign trust.
Form 3520 is due to be filed by the 15th day of the fourth month following the close of the tax year. The due date may be extended for six months by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, by the original due date of Form 3520.
Form 3520-A is due to be filed by the 15th day of the third month following close of the foreign trust’s tax year. Form 3520-A is extended for six months by filing form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, by the original due date of the Form 3520-A.
A U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules of Internal Revenue Code Sections 671-679 must file Form 3520 for the foreign trust for that year, and is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required statements to the trust’s U.S. owners and U.S. beneficiaries for that year.
Where an individual creates and funds a trust, retaining the right to revoke the trust, under the grantor trust rules he or she is deemed to own the trust for federal income tax purposes. But where a third party such as an employer creates and funds a trust for the benefit of an employee, the trust is not a grantor trust, and the employee is not deemed to own the trust for federal tax purposes, until the employee may make withdrawals from the trust. For example, if an employer in the United Kingdom establishes a self-invested personal pension (“SIPP”) for the benefit of a U.S.-person employee, under U.K. law the beneficiary cannot make withdrawals from the SIPP until reaching age 55. The SIPP is a grantor trust once the employee-beneficiary reaches age 55, and not before. Once the beneficiary reaches age 55, he or she must comply with the Form 3520 and Form 3520-A filing requirements as to the SIPP. Revenue Procedure 2020-17 could provide relief from the Form 3520 or Form 3520-A filing requirements as to SIPPs, but its terms are too vague to be relied upon.
Transfers to, ownership of, and distributions from a Canadian registered retirement savings plan (RRSP), a Canadian registered retirement income fund (RRIF), or any other Canadian retirement plan that is within the meaning of section 3 of Revenue Procedure 2014-55 are exempt from the Form 3520 reporting requirement. Similarly, custodians of RRSPs and RRIFs are exempt from the Form 3520-A filing requirement with respect to a U.S. citizen or resident alien who holds an interest in the RRSP or RRIF.
A U.S. person who fails to file a timely, correct, and complete Form 3520 is subject to a penalty equal to the greater of $10,000 of (1) 35 percent of the gross value of property transferred by the U.S. person to the foreign trust during the tax year; (2) 35 percent of the gross value of property distributed by the foreign trust to the U.S. person during the tax year; or (3) 5 percent of the gross value of the foreign trust’s assets deemed owned by the U.S. person under the grantor trust rules. Additional penalties may apply if the noncompliance continues for 90 days after the IRS mails notice of the noncompliance to the U.S. person.
The U.S. owner of a foreign trust is subject to a penalty equal to the greater of $10,000 or 5 percent of the gross value of the portion of the trust’s assets treated as owned by the U.S. person under the grantor trust rules at the close of that tax year if a timely, correct, and complete Form 3520-A is not filed for the trust, or required owner and beneficiary statements are not furnished with respect to the trust. Additional penalties may apply if the noncompliance continues for 90 days after the IRS mails notice of the noncompliance to the U.S. person.
Where a Form 3520-A is late-filed with a timely-filed Form 3520, the penalty for failure to timely file Form 3520-A should not be assessed.
The IRS may grant relief from penalties for failure to timely file Forms 3520 or 3520-A is due to reasonable cause and not willful neglect. There is reasonable cause where the taxpayer exercised ordinary business care and prudence but nonetheless was unable to comply with his or her tax obligations. The IRS makes reasonable cause determinations based upon the facts and circumstances of each case. Reasonable cause may exist, for example, where a taxpayer engages a professional tax preparer to prepare and file the taxpayer’s tax returns, and the preparer fails to timely file one or more of the taxpayer’s tax returns.