The IRS Targets Form 3520 & 3520-A Compliance, When to File

Do I File Form 3520, 3520-A, or Both, 6 Common Examples

The IRS Targets Form 3520 & 3520-A Compliance 

While there are many different international information reporting forms that U.S. taxpayers must file each year to report their foreign accounts, assets, investments, and income — Form 3520 (Foreign Gifts, Trusts, and Inheritance) and Form 3520-A (U.S. Owners of Foreign Trusts) are two of the most complicated international information reporting forms. The reason why these forms are so complicated is because, in general, foreign trust reporting is complex and requires the taxpayer to provide a significant amount of information to complete the forms, such as:

• • • Income Statement

    • Profit and Loss

    • Tax and Interest Calculation

    • Accrued Income

    • UNI/DNI

Common Form 3520 and 3520-A Reporting Examples

While Form 3520 is also used to report large foreign gifts and inheritances (and the reporting is relatively straightforward), when it comes to reporting foreign trusts, the Forms can become much more complicated to prepare. But, not all taxpayers are required to file both Form 3520 and Form 3520-A in the same year. Let’s look at a few common examples to distinguish between who has to file Form 3520 and Form 3520-A.

Dana Received a Large Foreign Gift

Dana is a U.S. person who recently received a $700,000 gift from her grandma who is a non-resident alien. The gift was cash from a foreign bank account that was transferred into a U.S. bank account. Since Dana received a large foreign gift, she is required to file Form 3520. However, because Dana is not the owner of a foreign trust, Dana is not required to file form 3520-A.

Adam is Trustor and Beneficiary of a Foreign Trust

Adam is a U.S. person who previously lived in a foreign country. Before relocating to the United States and becoming a U.S. Person, Adam was the owner of a foreign trust that he used to manage his foreign investments. Adam was also one of the beneficiaries of the foreign trust — but only one of several beneficiaries. In the current year, Adam did not receive any distributions. Since Adam is the owner of a foreign trust, he is required to file Forms 3520 and Form 3520-A, even though he did not receive any trust distributions.

Miranda is a U.S. person/Beneficiary of a Foreign Trust

Miranda is a U.S. Citizen although several of her family members live overseas and are not U.S. persons for tax purposes. Recently, Miranda’s aunt created a trust in which Miranda is a beneficiary. In the current year, Miranda received a trust distribution of $5,000.  In this example, Miranda does not own the foreign trust and does not have any ownership of any assets in the foreign trust, so she is not considered an owner of the foreign trust — and does not need to file Form 3520-A. However, since Miranda did receive a trust distribution, she is required to file Form 3520.

Scott Received a Foreign Inheritance

Scott is a U.S. person who has family members living overseas who are non-us persons. Scott received it for an inheritance of $300,000. In this example, Scott is required to file Form 3520 because he received a foreign inheritance, but since he does not have any ownership of a foreign trust, he’s not required to file Form 3520-A.

Dean is a Discretionary Beneficiary of a Foreign Trust

Dean is a US person who has family members living overseas paired with one of his family members who created a foreign trust in which Dean is a discretionary beneficiary. In the current year, Dean did not receive any distributions from the foreign trust. In this situation, Dean is not required to report either Form 3520 or Form 3520-A because he is not the owner of the foreign trust and did not receive any distributions.

Peter owns a U.S. Trust with Foreign Assets

This is where it begins to get complicated. In this example, Peter is a U.S. person who has ownership of a U.S. trust but he also has foreign assets located in his U.S. trust, such as foreign property and some investments which generate income. Even though technically the trust is considered a U.S. trust, since a portion of the trust is considered foreign Peter may be required to file Form 3520 andFform 3520-A since he is the owner of the trust, which also contains foreign assets.

Late Filing Form 3520/3520-A Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520-A and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.