IRS Form 3520-A Reporting
Form 3520-A: The Form 3520-A is an international information reporting form used to disclose foreign trusts to the IRS. The reporting requirements originate with Internal Revenue Code (IRC) section 6048(b). This code section requires U.S. person owners of foreign trusts to report their interest in a foreign trust to the IRS. When the form is filed by the trustee, it is due to be filed on by the “15th day of the 3rd month after the end of the trust’s tax year.”
If the trustee fails to file the form, then the owner must attach it to the form 3520 and submit it together by the date to file the Form 3520 (which is April 15th, including extensions).
The reason that the filing of form 3520 is so important is because the IRS has taken an aggressive approach on matters involving foreign accounts compliance and unreported offshore income (including foreign trust income).
If a taxpayer misses the filing, the IRS has also developed a new revenue procedure 2020-17, which limits the reporting of certain foreign trusts, and also abates form 3520-A penalties.
What is IRC 6048?
IRC 6048 refers to information returns with respect to certain foreign trusts. The code section is dense, but here are some of the basics:
(a) Notice of certain events
(1) General rule
On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).
(2) Contents of notice
The notice required by paragraph (1) shall contain such information as the Secretary may prescribe, including—
(A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and
(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.
(3) Reportable event
For purposes of this subsection—
(A) In general
The term “reportable event” means—
(i) the creation of any foreign trust by a United States person,
(ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and
(iii) the death of a citizen or resident of the United States if—
(I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or
(II) any portion of a foreign trust was included in the gross estate of the decedent.
Common Questions About Form 3520-A & Foreign Trusts
With a Foreign Trust, some common IRS International Tax and Reporting issues to consider are:
- What is a Foreign Trust?
- How do I report a Foreign Trust?
- What if I never received Foreign Trust distribution?
- Do I pay tax on Foreign Trust income?
- What if I am out of IRS compliance?
What is Foreign Trust Reporting on Form 3520-A?
A foreign trust is a trust that is governed by a foreign jurisdiction and/or with a foreign Trustee(s).
When the trust is “foreign,” it is subject to different IRS requirements and reporting rules.
The Trustee of the foreign trust is tasked with the responsibility of filing the annual 3520-A with the IRS.
If the Trustee does not file the form, the owner of the trust may be held liable for the trustee’s noncompliance.
Some Basics Terms and Definitions
Here are some of the basic terms and definitions about foreign trusts and Form 3520.
What is a Foreign Trust?
The Internal Revenue Service defines a foreign trust as “A foreign trust is any trust other than a domestic trust.”
A domestic trust is any trust if:
1. A court within the United States is able to exercise primary supervision over the administration of the trust, and
2. One or more U.S. persons have the authority to control all substantial decisions of the trust.”
In other words, to perform the analysis you would determine if it is a domestic trust.
If it is not a domestic trust then by default it is a foreign trust.
Who is a U.S. Owner?
Anybody who is considered a U.S. person will likely be considered a U.S. owner of a foreign trust.
This includes U.S. Citizens, Legal Permanent Residents and other individuals who meet the Substantial Presence Test (at least during the time in which they meet the test).
Who has to Report The Foreign Trust?
If there is a trustee, then typically as part of their duties the trustee will prepare and file the form with the Internal Revenue Service.
If the trustee does not file the form, the U.S. owner must still file the form.
An example we see often is when a U.S. based taxpayer is an owner of beneficiary of a foreign trust that is administered by a foreign trustee who does not complete any of the required Form 3520/3520-A reporting.
Thereafter, the US owner learns of the reporting requirement (3520, 3520-A, FBAR, Form 8938, 8621) and realizes that the trustee never filed the form.
The owner still must file the form(s).
Depending on how active or passive a foreign trust is, chances are there will be some accounting that needs to be handled in order for the trust to be properly reported.
For example, assets, equity, and liabilities will need to be detailed in the form 3520-A.
The trustee must also report whether or not beneficiaries received any distributions, and if taxes have already been paid either abroad or in the United States.
Generally, trust distributions that are considered income will be taxed to the grantor.
The purpose of this rule is to avoid the deep pocket grantor from artificially reducing their tax liability by distributing money to his children or other family members, which would presumably be taxed at a lower tax bracket.
Foreign Trust Penalties
The penalties associated with Foreign Trusts and Form 3520-A can be staggeringly high. As provided by the IRS:
The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value 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.
The U.S. owner is subject to an additional separate penalty equal to the greater of $10,000 or 5% of the gross value 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 U.S. owner
(a) fails to file a timely Form 3520 (Part II), or
(b) fails to furnish all of the information required by section 6048(b) or includes incorrect information.
See section 6677(a) through (c).
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.
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. Penalties may also be imposed under section 6662 (j) for undisclosed foreign financial asset understatements.
No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.”
What if I am Out of IRS Compliance?
When you have not met your prior year foreign trust compliance obligations and filing of form 3520-A, the IRS has developed various FBAR amnesty programs to assist you.
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