What is Form 3520?
If you are a U.S. person who received foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax.
A foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a nonresident alien individual or foreign corporation, partnership or estate.
Include on Form 3520:
You must aggregate gifts received from related parties. For example, if you receive $60,000 from nonresident alien A and $60,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520.
The IRS has specific reporting requirements for “foreign trusts.” A foreign trust is any trust over which a court in the United States can exercise primary jurisdiction for its administration or that has one or more U.S. persons with the authority to control all, or substantially all, of the decisions of the trust. The IRS has detailed guidance on these requirements.
Who must file 3520?
U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:
Certain transactions with foreign trusts,
Ownership of certain foreign trusts, and
Receipt of certain large gifts or bequests from certain foreign persons.
A separate Form 3520 must be filed for transactions with each foreign trust.
A foreign trust with a U.S. owner must file Form 3520-A.
Generally, U.S. persons who own foreign trusts must file Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner. (The owner of the trust is usually the trust grantor). Form 3520-A collects information about income, expenses, distributions, trust assets, trust owners, and beneficiaries, and is due on the 15th day of the third month after the end of the trust’s tax year. IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed by the owner of the trust on the same date as Form 3520-A, when one of the following apply:
Several of these reporting obligations fall to executors when the U.S. person dies.
There are several important points here. First, several trust-related and gift transactions would not normally be reported to the IRS. For example, if a U.S. person creates a domestic revocable trust, he or she likely has no independent obligation to report the transaction to the IRS. Likewise, a recipient of a foreign gift is required to file Form 3520, but the recipient of a domestic gift has no such obligation. When a U.S. person makes a domestic gift, only the donor files a gift tax return. As a result, U.S. persons who receive large gifts are frequently not asked by their tax professional about these transactions. Thus, failing to report foreign gifts can be an easily made mistake.
Transfers and distributions to foreign business entities that have relationships with U.S. persons also can be subject to the Form 3520 reporting requirement. For example, if a foreign corporation receives a gift from another foreign corporation, but the donee corporate entity is owned by a U.S. person, then the donee corporation must file Form 3520.2 The requirement to file a Form 3520-A is independent of the Form 3520 filing requirement, so a U.S. owner often will need to file both.
How to file Form 3520
File Form 3520 separately from your income tax return. The due date for a U.S. person to file a Form 3520 is the 15th day of the 4th month following the end of the U.S. person’s tax year. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month following the end of the U.S. person’s tax year.
Note: it may also require you to file FinCEN Form 114. See Report of Foreign Bank and Financial Accounts (FBAR) for more details. Also, you may be required to file Form 8938, Statement of Specified Foreign Financial Assets.
When and Where to file
File by the 15th day of the 3rd month after the end of the trust’s tax year, the due date may be extended by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns.
Form 7004 must be filed with an Employer Identification Number (EIN) for the foreign trust. Forms 7004 for a foreign trust cannot be processed under an individual’s Social Security Number (SSN). Please obtain an EIN for the foreign trust.
If the foreign trust will not file a Form 3520-A, the U.S. owner of the foreign trust must file a substitute Form 3520-A by completing a Form 3520-A to the best of their ability and attaching it to a timely filed Form 3520, including extensions (see Form 3520 Instructions for more information on filing a substitute Form 3520-A). Do not separately file a duplicate Form 3520-A if you are filing a substitute 3520-A.
If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year.
Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
Form 3520 must have all required attachments to be considered complete.
Why file and Filing tips to avoid penalties:
If the U.S. person does not file a Form 3520 more than 90 days after the IRS notifies him or her of noncompliance, there is a further penalty of $10,000 for each additional 30 days of noncompliance. The penalty for failing to file a Form 3520 that should have reported a foreign gift or bequest, or for filing an incorrect or incomplete form with respect to a gift or bequest, is 5% of the gift or bequest for each month during which the failure continues, up to a maximum of 25% of the gift.
The penalty for failing to file a Form 3520-A is the greater of $10,000 or 5% of the value of the corpus of the trust attributable to the U.S. owner. There is no statute of limitations for the IRS to impose penalties, and the agency can impose multiple 5% penalties. The IRS may also impose large penalties if a Form 3520 is not timely filed, is incomplete, or is incorrect. The penalty is the greater of $10,000 or:
Unlike nearly every other tax penalty, when the IRS imposes 3520-A and 3520 penalties, these actions are not subject to normal deficiency rules. In short, there is no right to challenge its determination in court unless he or she pays the entire penalty first. Practitioners have shared anecdotes about returns that were mailed a few months late or had one blank line, and the IRS reportedly imposed the maximum penalty, which the taxpayer cannot challenge in court until the total amount is paid. The IRS has an amnesty program for other delinquent international tax forms, but taxpayers who need to submit Forms 3520 and 3520-A are not eligible for this program.
No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.