Many taxpayers with international activity are becoming more familiar with informational reporting on foreign bank accounts, foreign corporations, and foreign financial assets. However, many still struggle with certainty when it comes to reporting transactions with foreign trusts or receipt of foreign gifts/bequests on Form 3520. As with most foreign informational reporting, this is not a form to be ignored or taken lightly as it carries significant penalties.
Who is Required to File Form 3520?
Form 3520 is used to report the following:
- certain transactions with foreign trusts
- ownership of foreign grantor trusts
- receipt of large gifts or bequests from foreign individuals/companies
The form is filed by US persons and executors of estates of US decedents. If transfers are made to or from a foreign trust, it can trigger a filing requirement. Ownership of a foreign grantor trust is another common trigger that people miss. Domestic grantor trusts often do not require a separate filing from the grantor. Unfortunately, foreign grantor trusts do not operate the same way when it comes to information reporting.
There are some exceptions to filing that provide relief. For example, those with a Canadian registered retirement savings plan (RRSP) or a Canadian registered retirement income fund (RRIF) do not have to file to report transfers to, ownership of, or distributions from the RRSP or RRIF.
Gifts or bequests in excess of $100,000 from a foreign individual/estate or $16,649 from a foreign corporation/partnership are required to be disclosed. As we have noted previously, there are some special aspects to reporting the foreign gifts.
What is Required to be Filed?
Form 3520 reports information about foreign trusts which have had certain transactions, ownership of foreign grantor trusts, and foreign gifts/bequests. There is no tax on this form. It is simply informational and includes addresses, amounts, dates, descriptions of amounts, etc. Form 3520 is a six-pages and requires an attachment if you received a Foreign Grantor Trust Beneficiary Statement or a Foreign Nongrantor Trust Beneficiary Statement. If the foreign trust filed a Form 3520-A, an attachment of the Foreign Grantor Trust Owner Statement will also be required. It is advisable to consider the Form 3520-A requirements when preparing your Form 3520.
If the required attachments are not included with the filing, it will not be deemed complete. Often, if foreign information filings were required and either not filed or incomplete, the statute of limitations may not have begun to run on the period. It is crucial to file paperwork in a complete and accurate method instead of filing partially complete or incorrect information with the expectation of amending later. The IRS does not look kindly on purposefully filing things incomplete or inaccurate.
When is the Filing Due?
The due date for Form 3520 is generally April 15th. In the event that the tax return you are filing it with gets extended, the Form 3520 will be extended along with that return. The filing upon extension is generally due on October 15th. Form 3520-A is due March 15th.
Where Do I File Form 3520?
Currently, the form (and attachments) are filed by mailing them to the Ogden UT Service Center. Always check the mailing address from the latest material sent by the IRS to make sure you are using the right location. It would be unfortunate for your filing to get held up, lost, or for notices to be generated simply because the wrong address was used. It may also be advisable to avail yourself of the certified mail or return receipt features of the USPS. Alternatively, it is wise if shipping from abroad to use a method approved by the IRS and to obtain tracking on the shipment. Any tax document you are mailing from abroad should absolutely have tracking.
Why is Filing Form 3520 Important?
You may be wondering why you need to go through the trouble of filing Form 3520. First and foremost, there are significant penalties associated with not filing when required. The penalty can be the greater of either:
- $10,000 per form, or
- A percent of the transfers, distributions, or trust assets
It would be a shame for a penalty of 5% of the trust assets to be assessed simply due to a lack of filing. And the penalty can go as high as 35% of transfers or distributions. There are some ways to try to address the lack of filing if non-willful as listed previously.
It is also important to file the foreign trust filings as it makes for a more even playing field. This is especially true when considering that domestic trusts report to the IRS and file the amounts for their beneficiaries.
Where Do We Come In?
Ryan & Wetmore has helped many people file their Form 3520 filings. It is highly encouraged that you treat this filing requirement with due care. With the severity of the penalties, you do not want to miss the deadlines or file inaccurately.
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.