Form 3520 Late Filing
Form 3520 Late Filing: The form 3520 is used to report gifts from foreign individuals, entities, as well as trust distributions to the IRS. The reason why this form has many taxpayers up in arms is because of the sheer magnitude of the penalties the IRS issues regarding the noncompliance.
What makes the penalties so lopsided, is that many people who are penalized do not have any tax liability with the United States and have no other FATCA or FBAR reporting requirements.
Oftentimes, an individual may be a student or retiree who receives a gift from their parents or other relatives — or even an inheritance from overseas.
Since the IRS has increased enforcement of form 3520, it is important to stay in compliance with reporting – and to get into compliance if you have not already done so.
Who Has to File the Form?
There are four categories of situations that may require the filing of form 3520. It is important to note that it is not the actual or in person giving the gift who must file the form. This is BK’s the IRS and US tax system does not have blanket jurisdiction over foreign persons.
Rather, it is the US person who received a gift from the foreign person, for distribution from the foreign trust who has to file.
Situations which may require form 3520, include:
(a) You are a U.S. transferor who, directly or indirectly, transferred money or other property during the current tax year to a foreign trust
(b) You are a U.S. person who (1) during the current tax year, transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation, or (2) holds a qualified obligation from the trust that is currently outstanding, or (c)
You are the executor of the estate of a U.S. decedent and (1) the decedent made a transfer to a foreign trust by reason of death, (2) the decedent was treated as the owner of any portion of a foreign trust immediately prior to death, or (3) the decedent’s estate included any portion of the assets of a foreign trust. Complete all applicable identifying information requested below and Part I of the form and see the instructions for Part I. You are a U.S. owner of all or any portion of a foreign trust at any time during the tax year. Complete all applicable identifying information requested below and Part II of the form and see the instructions for Part II. You may also need to complete lines 15 through 18 of Part I if you answered “No” to line 3 and Part III. See the instructions for Parts I and III.
(a) 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, (b) You are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year, you or a U.S. person related to you received (1) a loan of cash or marketable securities, directly or indirectly, from such foreign trust, or (2) the uncompensated use of trust property, or (c) You are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you. Complete all applicable identifying information requested below and Part III of the form and see the instructions for Part III.
You are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you.
Complete all applicable identifying information requested below and Part III of the form and see the instructions for Part III.
You are a U.S. person who, during the current tax year, received certain gifts or bequests from a foreign person. Complete all applicable identifying information requested below and Part IV of the form and see the instructions for Part IV
Trust vs. Gift
The requirements for filing the form vary based on whether a person is dealing with a foreign trust or foreign gift.
What a person is dealing with a foreign gift, the requirements are relatively minimal. Unless the gift is from a foreign entity, the US person does not even need to identify the name of the Foreign Person.
Conversely, when the matter involves a foreign trust, there is much more reporting that is required.
Missed Filing Form 3520
If you missed the filing of form 3520, it is important to speak with an experienced offshore attorney specialist before submitting a reasonable cause statement.
While a reasonable cause submission package cannot always to prevent the penalty without fighting it after-the-fact, oftentimes the penalty may have been avoided if the reasonable cause statement was better written.
Because when tax practitioners learn they missed the 3520 requirement — and the sheer magnitude of the penalties — they hurriedly submit a reasonable cause letter that lacks in substance and is less than persuasive.
“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.
Reasonable Cause Form 3520
“No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. Note. The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause. See section 6677(d) for additional information. Section 6039F.
In the case of a failure to timely report foreign gifts described in section 6039F, the IRS will determine the income tax consequences of the receipt of such gift, and a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%).
No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. See section 6039F for additional information.
If a U.S. owner of a foreign trust is subject to a penalty imposed under section 6662 for an underpayment of tax required to be shown on a return, then such penalty may be increased under section 6662(j) for any portion of an underpayment which is attributable to any transaction involving any asset with respect to which information was required to be provided on Form 3520-A.
For more information about undisclosed foreign financial asset understatements, see section 6662(j).
No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See section 6662 and section 6664(c) for additional information.”
Foreign Gift, Trust, and Inheritance Tax Specialist Team
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
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