- 1 Form 3520-A
- 2 Grantor vs Non-Grantor Trust Tax Rules
- 3 Who has to File Form 3520-A?
- 4 Purpose of the Form 3520-A
- 5 Who Must File Form 3520-A?
- 6 When and Where to File Form 3520-A?
- 7 Exceptions to 3520-A Form Filing
- 8 Help Guide for Actually Completing the Form
- 9 Form 3520-A Penalties
- 10 Form 3520-A Reporting is Complex
- 11 Golding & Golding: International Tax Law Firm Specialist Team
Form 3520-A Foreign Trust Reporting & Filing: The IRS Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)) is a complex international information reporting form. When it comes to international tax and offshore tax compliance for US Persons, it does not get much more complicated than foreign trusts and Form 3520-A. Specifically the 3520-A Form is required for Owners, Trustees and Beneficiaries of foreign trusts. Making it more complicated is that the Internal Revenue Code does not specifically define what a trust is (which may include foreign pension plans as well, such as the Australian Superannuation). Whether it is a grantor trust, non-grantor trust, or an unintentional trust such as a foreign employment/pension trust — the IRS reporting rules are complicated. While there are some exceptions and Revenue Procedures in place (such as Revenue Procedure 2020-17) foreign trust reporting is not for the faint of heart. Let’s take a look add some of the basics regarding foreign trust reporting perform 3520-A.
Grantor vs Non-Grantor Trust Tax Rules
At the most basic level, if a US person is an owner of a Grantor Trust then the US person owner of the grantor trust is taxed on the income — even when it is distributed to the beneficiaries. The purpose of this rule is to avoid wealthy people from artificially reducing their tax liability by assigning income to lower tax bracket beneficiaries. With a Non-Grantor trust — the income is taxed to the recipient.
Who has to File Form 3520-A?
Unlike IRS Form 3520 the deals with gifts and trust distributions to a US person — the form 3520-A refers specifically to the reporting of a foreign trust with a US owner. Taking that statement at the most basic level, it means that form 3520-A is required annually by:
- Certain US owners of
- Foreign Trusts.
Purpose of the Form 3520-A
As provided by the IRS:
Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner.
The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671 through 679).
What does this Mean?
It means that if there is at least one US owner of a foreign trust (noting that the US person does not have to be the only owner) then the form 3520-A may be required.
Who Must File Form 3520-A?
As provided by the IRS:
A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).
Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.
If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year) in order to avoid being subject to the additional separate penalty for the foreign trust’s failure to file a Form 3520-A. See Line 22 in the Instructions for Form 3520. See Penalties, later.
What does this Mean?
Internal Revenue Code section 6048 provides for certain requirements for US owners of foreign trusts. In order to meet the reporting requirements under IRC 6048, the US owner of a foreign trust files form 3520-A. A US person is considered an owner of a foreign trust, if they meet the ownership requirements under the Grantor rules laid out in IRC 671-679.
The Internal Revenue Service places the responsibility squarely on the shoulders of the US person owner of the foreign trust timely and accurate reporting. Thus, if the trust does not file its own form 3520-A, then the US owner is required to submit a substitute form. If this is the case, then the US person follows the rules of the form 3520 Due Date — and not the form 3520-A due date (former is generally 4/15 and latter is generally 3/15).
When and Where to File Form 3520-A?
The due date for filing form 3520-A is different than the due date for filing form 3520 (absent the exception indicated above when the US taxpayer has to submit their own form 3520-A).
As provided by the IRS:
File a complete Form 3520-A (including the statements on pages 3 through 5) with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, by the 15th day of the 3rd month after the end of the trust’s tax year. However, if you are filing a substitute Form 3520-A with your Form 3520, then your substitute Form 3520-A is due by the due date of Form 3520. See the Instructions for Form 3520 for the due date of the Form 3520.
Give copies of the Foreign Grantor Trust Owner Statement (pages 3 and 4 of Form 3520-A) and the Foreign Grantor Trust Beneficiary Statement (page 5 of Form 3520-A) to the U.S. owners and U.S. beneficiaries by the 15th day of the 3rd month after the end of the trust’s tax year, or later if an extension of time to file is granted or if filing a substitute Form 3520-A.
An automatic 6-month extension of time to file Form 3520-A (including the statements on pages 3 through 5) may be granted by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, with the foreign trust’s employer identification number (EIN) by the 15th day of the 3rd month after the end of the trust’s tax year. For details, see Form 7004.
An extension of time to file an income tax return will not provide an extension of time to file Form 3520-A. Form 7004 with the foreign trust’s EIN must be filed in order to request an extension of time to file Form 3520-A.
Exceptions to 3520-A Form Filing
There are some exceptions to having to file form 3520-A. some of the exceptions and exemptions or clear (RRSP) while others are more ambiguous (Rev Proc. 2020-17)
As provided by the IRS:
- Proc. 2014-55, exempts from foreign trust information reporting certain Canadian retirement plans, including Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs), regardless of whether you are an eligible individual described in section 4.01 of Rev. Proc. 2014-55.
- Proc. 2020-17 exempts from foreign trust information reporting certain eligible individuals’ transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits.
- The exemptions from foreign trust information reporting described in Rev. Proc. 2014-55 and Rev. Proc. 2020-17 do not affect any reporting obligations under section 6038D or under any other provision of the U.S. law, including the requirement to file Financial Crimes Enforcement (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. section 5314 and the regulations thereunder.
Help Guide for Actually Completing the Form
Once you get past the preliminary basics of who needs to file the form and when — is the (sometimes) massive undertaking of actually preparing the form itself. Generally, taxpayers should consider working with and experienced Tax Law Specialist when preparing the form — but if you prefer to give it your own go at it (presuming it’s the current year and you’re not out of compliance in prior years) here’s a few tips:
Should I Apply for an EIN?
At the beginning of the form, it asks the person completing it to include the EIN.
The EIN is An employer identification number. It may not be relevant to your situation, and the instructions uses the term may and not must or shall — So it may not be applicable to your trust situation — check before submitting.
Did You Appoint a US Agent?
When you get to the top middle part of the first page you will notice that it asks about whether there has been a US Agent appointed to the trust. If you have not done so already, and have not submitted documentation to the IRS that it asks for in 2a to 2e — you may consider appointing one — especially if you want to avoid submitting all of the documentation requested under subsection (2) of Page 1 to the IRS — such as a copy of the written trust, other memoranda and organizational charts.
Foreign Trust Income Statement
Even the IRS knows it can be difficult to obtain all of the necessary information to complete this portion of the Form. that is why the IRS provides the following:
“Include all income from U.S. and non-U.S. sources. This financial statement must reasonably reflect the trust’s income under U.S. income tax principles.”
The submission does not need to be perfect, but it needs to be reasonably accurate —
Balance Sheet for Form 3520-A
The single most important aspect of the balance sheet is the balance sheet. It is important to do your best to try to balance the foreign trust financial information as best as possible.
Because if the sheet does not balance then you are significantly increasing your chance of scrutiny by the IRS — and it gives them an easy reason to audit the document.
Foreign Grantor Trust Owner Statement
The Foreign Grantor Trust Owner Statement is used to identify each US person who is treated as an owner of the foreign trust.
Foreign Grantor Trust Beneficiary Statement
Likewise, the foreign grant or trust beneficiary statement is furnished to each beneficiary who receives a distribution from the trust in that year. This is crucial, because there is no need to file the form unless the person received a distribution.
If the person is a beneficiary who received the distribution, then they will also file form 3520.
Form 3520-A Penalties
When it comes to offshore compliance, the penalties for noncompliance with form 3520 and 3520-A can be tough. That is because the penalties can be based on a portion of the value of the trust with certain minimal penalty thresholds as follows:
The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c).
If a foreign trust fails to file a Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for Form 3520-A) in order to avoid being subject to a penalty for the foreign trust’s failure to file a Form 3520-A. For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as April 15 for the U.S. owners who are individuals) is considered timely filed.
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. If the IRS can determine the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year, then the penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross value of the trust. For more information, see section 6677.
Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.
If a U.S. owner of a foreign trust is subject to a penalty imposed under section 6662 for an underpayment of tax required to be shown on a return, then such penalty may be increased under section 6662(j) for any portion of an underpayment which is attributable to any transaction involving any asset with respect to which information was required to be provided on Form 3520-A. For more information about undisclosed foreign financial asset understatements, see section 6662(j).
Reasonable cause. No penalties will be imposed if the taxpayer can demonstrate that the failure to comply with the reporting requirements was due to reasonable cause and not willful neglect.
The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause. See section 6677(d) for more information.
Form 3520-A Reporting is Complex
In conclusion, IRS Form 3520-A is one of the most complicated international tax forms required to be filed by certain US persons who have an ownership of a foreign trust. The form is very detailed, and the IRS estimates upwards of 40-hours to complete the form. if you have not completed the form in prior years then before submitting the current year you may want to speak with a Board-Certified Tax Attorney Specialist to get a general idea of what the requirements are, what the penalties may be – and how you may possibly avoid or Abate foreign trust reporting penalties.
Golding & Golding: International Tax Law Firm Specialist Team
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.