By Bethany Bouw
Perhaps you remember from grade school considering the five W questions for a topic to make sure you really comprehended the material. Well, foreign trust reporting (Form 3520-A) is a topic that deserves this treatment to make sure you do not miss a crucial step and end up with a late filing. Let’s walk through the five W’s together:
A foreign trust is defined by the IRS as “any trust other than a domestic trust”. US owners are US persons who are treated as the owner of any of the assets according to grantor trust rules. A US person is not limited to only individuals. It is important to note that for purposes of reporting on the Form 3520-A, a US person can include a domestic partnership, corporation, estate, or trust. This can trick you if the instructions are not read carefully and it is a great reason why it is so very important to get a qualified tax professional involved as soon as you have a connection to a foreign trust, let alone ownership.
Foreign trusts with one or more US owners are to annually file a Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner. The filing reports income statement and balance sheet information for the foreign trust for the year. Also included in the filing are the foreign Grantor Trust Owner Statement, Statement of Foreign Trust Income Attributable to US Owner, and a Foreign Grantor Trust Beneficiary Statement.
The Foreign Grantor Trust Owner Statement discloses the US owner(s) and is included with the Statement of Foreign Trust Attributable to US Owner. The Statement of Foreign Trust Attributable to US Owner discloses the income and expenses from the income statement that belongs to the US owner disclosed in the section above the statement.
The Foreign Grantor Trust Beneficiary Statement discloses the US beneficiaries that received a distribution from the trust during the year. It includes the description and fair market value of the distribution.
There is a separate form for individuals to report their transactions and ownership with foreign trusts. It is similarly named as Form 3520. It is important for taxpayers to know that the two forms have different purposes and different due dates.
The filing for Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s tax year.
- For those with a calendar year, the due date is MARCH 15.
- This deadline did NOT move to April 15th, like the Form 1120 due date did under recent tax law changes.
- This also means if you as an individual have a requirement to report on the Form 3520-A for your foreign grantor trust, that you must be prepared to either file or extend by March 15, not April 15th with your Form 1040.
- This is important to remember, as it is easy to think it is due April 15th with your Form 1040 like the very similarly referenced and also foreign trust related Form 3520.
- The Form 3520-A (note that the form we have been talking about has an A on the end) can be extended for 6 months on Form 7004. PLEASE NOTE: This form is not extended with your income tax return extension request. It must be submitted on a timely file Form 7004.
- The Owner and Beneficiary statements must be provided to those parties by the 15th day of the 3rd month after year end (March 15 if a calendar year trust) unless the Form 3520-A is extended.
Form 3520-A is filed on paper with the Ogden, Utah IRS service center, as is the extension request for the Form 3520-A on Form 7004. The owner and beneficiary statements are to be provided to those parties to be included in their own Form 3520 filings. It is important that the Form 3520-A meets that requirement for the benefit of the US owner and US beneficiary.
Form 3520-A is required in order to document the trust financials and the US person’s income. The form has severe penalties for lack of filing. The penalties can be up to the greater of $10,000 or 5% of the trust assets. These can be assessed for failure to file timely, failure to provide all the information, or providing incorrect information. The penalties are high because the lack of compliance can be substantial. It is very important that those entrusted with the foreign trust take the proper steps so as to not generate significant penalties. If there is a delinquent filing there are some ways to rectify the situation via disclosure procedures.
Ryan & Wetmore has experience assisting clients with their foreign trust filings and compliance over the years. We would be happy to assist you if you have concerns about your foreign trust reporting.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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