Form 3520 Example
Form 3520 Example: The IRS Form 3520 is used to report foreign transactions involving foreign gifts, inheritances and/or certain foreign trust transactions. The Form 3520 can be a complicated form, depending on the nature and extent of required reporting. Complicating the submission is that many U.S. Persons may not even know they have to file the form (oftentimes it is because they have no income or tax return filing requirement). Nevertheless, the Form 3520 is still required. Once a person realizes they are out compliance with the IRS, coupled with sheer magnitude of penalties — they panic.
Let’s review Form 3520 examples to assist you with the concept.
Form 3520 Examples
Here are some common Form 3520 examples of individuals with a Form 3520 Reporting Requirement:
A. Foreign Person Gift of More than $100,000 (Common Form 3520 Example)
A gift from a foreign person is by far the most common Form 3520 situation.
David is from Taiwan, and now resides in the U.S. as Legal Permanent Resident. His parents are Taiwanese, and non-U.S. Persons. They want to help David purchase a home in the U.S, so they gift him $900,000. The gift is from a foreign person, and exceeds $100,000, so it is reportable on Form 3520.
- It does not matter if the gift was a single transactions, or 10 transactions of $90,000 (in the same year).
- It does not matter if David does not have a tax return filing requirement (because his income is below the threshold)
B. Foreign Corporation or Partnership Gift of More than $16,388
Michelle is from Spain but resides in the U.S. on an H-1B Visa and meets the Substantial Presence Test.
Here parents own several corporations in Spain, and they want to give her a gift. Under foreign law, it would benefit the parents (non-U.S. Persons) to give the gift from the foreign corporation instead of by themselves as individuals.
The corporation gifts Michelle $24,000.
The gift is reportable on Form 3520.
C. U.S. Person Transferred Money into Foreign Trust
When a person is a U.S. person and transfers money into a foreign trust, they may also required to file Form 3520.
For example, Scott is a Green Card Holder who transferred $85,000 into a foreign trust. This transaction is reportable on Form 3520.
As provided by the IRS:
- “You are a U.S. transferor who, directly or indirectly, transferred money or other property during the current tax year to a foreign trust.”
D. U.S. Owner of a Foreign Trust
When a U.S. Person owns a foreign trust, they may be required to report the trust on Form 3520 depending on various factors. In addition, the person may have to file other forms, such as Form 3520-A.
As provided by the IRS:
- “You are a U.S. owner of all or any portion of a foreign trust at any time during the tax year.”
E. Distributions from a Foreign Trust
Receiving a Foreign Trust Distribution automatically puts a U.S. Person the radar. If a U.S. person receives a distribution from a foreign trust, that distribution is reported to the IRS on Form 3520.
As provided by the IRS:
- “You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who, during the current tax year, received, directly or indirectly, a distribution from a foreign trust…”
Penalties for Not Filing IRS Form 3520
As further provided by the IRS:
“Penalties Section 6677.
A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause). Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).
- 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
- 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
- 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II.
Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if such person (a) fails to ensure that the foreign trust files a timely Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information.
If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year in order to avoid being subject to the additional separate penalty for the foreign trust’s failure to file Form 3520-A.
For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as, April 15 for U.S. owners who are individuals), is considered to be timely filed. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.
If the IRS can determine the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year, then the additional penalties will be reduced as necessary to assure that the aggregate amount of such penalties do not exceed the gross value of the trust. For more information, see section 6677.”
International Tax Law Specialist Team: Golding & Golding
We hope these Form 3520 examples have been helpful.
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.
Contact our firm today for assistance with getting compliant.