U.S. persons who create, transfer property to, or receive distributions from foreign trusts, as well as those receiving certain large gifts or bequests from non‑U.S. persons, must navigate the complex reporting requirements of IRS Forms 3520 and 3520‑A. Missing these deadlines or filing incomplete returns can trigger severe monetary penalties. This guide provides a comprehensive overview of the filing deadlines, available extensions, and potential penalties for late or non‑filing of Forms 3520 and 3520‑A.
Overview of Form 3520 and Form 3520‑A
Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” is filed by U.S. persons who:
- Create or transfer money or property to a foreign trust.
- Receive distributions from a foreign trust.
- Receive gifts or bequests from non‑resident aliens, foreign estates, or foreign corporations exceeding certain thresholds.
Form 3520‑A, “Annual Information Return of Foreign Trust With a U.S. Owner,” is filed by the trustee of a foreign trust that has one or more U.S. owners. It provides the IRS with information about the trust’s assets, income, distributions, and U.S. beneficiaries.
Who Must File Form 3520?
You must file Form 3520 if, during the tax year:
- You are a U.S. person and you contribute any money or property to a foreign trust.
- You are treated as the owner of any portion of a foreign trust under the grantor trust rules.
- You receive a distribution from a foreign trust.
- You receive gifts or bequests from a non‑U.S. person that exceed $100,000 in aggregate from non‑resident individuals or estates, or $17,339 (adjusted annually) from foreign corporations or partnerships.
Who Must File Form 3520‑A?
The trustee of a foreign trust with at least one U.S. owner as defined under section 679(a) must file Form 3520‑A. A U.S. owner includes any U.S. person who is treated as the owner of any portion of the trust under the grantor trust rules. Trustees include individuals, banks, or other fiduciaries located inside or outside the United States.
Form 3520: Standard Filing Deadline
Form 3520 is filed with your individual or entity income tax return:
- For individuals, the due date is April 15 of the year following the calendar year in which the reportable event occurred.
- For calendar‑year corporations, estates, and trusts, the due date is the 15th day of the 4th month after the tax year ends (also April 15).
Example: A U.S. person receiving a foreign trust distribution in 2024 must file Form 3520 by April 15, 2025.
Form 3520‑A: Standard Filing Deadline
Form 3520‑A must be filed by the trustee of the foreign trust by the 15th day of the 3rd month after the end of the trust’s taxable year. For trusts operating on a calendar year, the due date is March 15 of the following year.
Example: A foreign trust with calendar‑year accounting must submit Form 3520‑A by March 15, 2025, for the 2024 year.
Extension Options for Form 3520
U.S. persons filing Form 3520 can extend the due date by obtaining an automatic extension of time to file their income tax return:
- Individuals can file Form 4868 by April 15 to extend their Form 1040 (and attached Form 3520) deadline to October 15.
- Corporations and other entities use Form 7004 to extend the deadline of their income tax return (and attached Form 3520) by six months.
No separate request is required specifically for Form 3520 if the underlying tax return is extended properly.
Extension Options for Form 3520‑A
The trustee can request an extension for Form 3520‑A by filing Form 7004 (for entities) before the March 15 deadline, which grants a six‑month extension, moving the due date to September 15. It is crucial that the trustee file Form 7004 on time to avoid penalties for Form 3520‑A.
Penalties for Late or Non‑Filing
Form 3520 Penalties
- Failure to File on Time: A penalty of $10,000 for each failure to file Form 3520 by the due date (including extensions).
- Continued Failure: If the failure continues for more than 90 days after IRS notice, an additional $10,000 penalty accrues for each 30‑day period of continued failure, up to a maximum of $50,000.
- Transfer Penalty: For transfers to a foreign trust, up to 35% of the gross value of the property transferred.
Form 3520‑A Penalties
- Failure to Furnish Form 3520‑A: A penalty of $10,000 for each year the trust fails to provide a complete Form 3520‑A to the IRS.
- Additional Penalties: If the trustee fails to correct the omission within 90 days of IRS notice, a penalty of $10,000 per 30‑day period may apply, up to a maximum of $50,000.
Note: Penalties for Forms 3520 and 3520‑A are assessed separately and can stack if both forms are delinquent.
Reasonable Cause and Penalty Relief
The IRS may waive penalties if the filer demonstrates “reasonable cause” and absence of willful neglect. Acceptable reasons include:
- Serious illness, death, or incapacitation of the taxpayer, trustee, or preparer.
- Reliance on incorrect professional advice in writing.
- Unforeseeable events such as natural disasters impeding timely filing.
Filing a written statement explaining the circumstances and corrective actions can improve chances of penalty abatement.
Best Practices for Compliance
- Early Identification: Determine if Forms 3520 or 3520‑A are required as soon as you engage with or control a foreign trust.
- Maintain Detailed Records: Track dates and values of transfers, distributions, and gifts to foreign entities.
- Use Calendar Alerts: Set reminders for March 15, April 15, and extension deadlines.
- Engage Qualified Advisors: Work with international tax specialists familiar with foreign trust reporting requirements.
- File Extensions Promptly: Ensure Form 4868 or Form 7004 is filed before the original due dates to secure additional time.
Conclusion
Forms 3520 and 3520‑A impose stringent reporting obligations on U.S. persons and trustees of foreign trusts. Understanding the due dates, extension mechanisms, and severe penalties for late or non‑filing is critical. By proactively managing deadlines, maintaining comprehensive records, and seeking professional guidance when needed, taxpayers and trustees can satisfy compliance requirements and minimize exposure to IRS penalties.
