What is Form 3520?
Form 3520 is an information return used by U.S. persons, and executors of estates of U.S. decedents, to report transactions with foreign trusts, ownership of foreign trusts, creation of foreign trusts, death of certain U.S. decedents who own, or whose gross estate includes, any portion of foreign trusts, and receipt of large gifts from foreign persons. A foreign trust is a non-domestic trust—that is, a trust controlled by one or more U.S. persons whose administration is outside the supervision of U.S. courts.
Filers that transact with multiple foreign trusts must provide a separate Form 3520 for each foreign trust. The form must be filed on the 15th day of the 4th month following the end of the filer’s tax year; however, filers who live and do business outside of the U.S. and Puerto Rico, and military or naval personnel stationed outside of the U.S. and Puerto Rico, have an extra 2 months to file. Spouses can file a joint Form 3520 with a joint income tax return if the spouses received property or money from the same foreign trust.
The penalty for failure to timely file Form 3520 is 35% of the gross value of the property or distribution exchanged, 5% of the gross value of the foreign trust’s assets, or $10,000—whichever is greatest. Failure to rectify the deficiency within 90 days of notice by the IRS will result in additional penalties of an undefined amount. If the failure to comply was the result of reasonable cause, not willful neglect, then there will be no penalty.
The following U.S. persons must file Form 3520:
- Responsible parties (g., trust grantors who create or fund the trust, transferors, and estate executors) for reporting a reportable event.
- Transferors of property or money to a related foreign trust, or a person related to the trust (e., the trust grantor, beneficiary, or a relative of the grantor or beneficiary) in exchange for an obligation.
- Owners of any part of the assets of a foreign trust.
- Recipients of
- Gratuitous foreign trust distributions, including
- Constructive transfers such as checks and credit obligations of the person that are honored by the trust, and
- Amounts paid by the trust as payment for property or services rendered that exceed the fair market value of such property or services
- Gifts or bequests of more than $100,000 from a nonresident alien individual or a foreign estate; or
- Gifts of more than $16,076 from foreign corporations or foreign partnerships.
- Gratuitous foreign trust distributions, including
- Foreign trust owners or beneficiaries who receive, or who are affiliated with related persons (e., family members, spouses of family members, and corporations where a majority of stock value is held by the foreign trust owner or beneficiary) who receive, loans or securities from such foreign trusts.
- Foreign trust owners or beneficiaries that are granted, or who are affiliated with related persons who are granted, uncompensated use of trust property.
There are seven exceptions to this reporting requirement:
- Transfers to foreign trusts described in IRC sections 402(b), 404(a)(4), or 404A.
- Most fair market value transfers by U.S. persons to foreign trusts do not have to be reported.
- Transfers to foreign trusts with 501(c)(3) status, and transfers from foreign trusts to domestic trusts with 501(c)(3) status, are also exempt.
- Ownership of, transfer to, and distributions from Canadian retirement plans.
- Distributions from foreign trusts as compensation for services rendered do not need to be reported in this form as long as the recipient reports the distribution as income.
- Deemed transfers from domestic trusts that during the tax year have become foreign trusts owned by a foreign person.
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For other posts summarizing IRS foreign reporting forms, check out our prior posts on Form 5471 and Form 5472.
Other Related Articles:
- Everything That You Need To Know About International Tax Penalties
- Form 3520-A, Information Return of Foreign Trusts With a U.S. Owner
- Form 8865, U.S. Persons and Foreign Partnerships
- The FBAR (Report of Foreign Bank and Financial Accounts): Everything You Need to Know
- Why (Nearly) Every Partnership Agreement Should be Amended
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