A Foreign Trust Penalty Overview: Late & Delinquent Filing Facts

Foreign Trust Penalties for Delinquent Forms 3520/3520-A Explained

Foreign Trust Penalties for Late-Filing 3520/3520-A

To facilitate compliance with offshore reporting initiatives, the IRS has developed many different international information reporting forms that require Taxpayers to disclose overseas assets such as foreign businesses, accounts, investments, and foreign trusts to the US Government. And, for the past several years, the Internal Revenue Service has been on the hunt for taxpayers who did not timely file international information forms — or filed them late. When it comes specifically to foreign trust reporting, taxpayers who have ownership or interest in a foreign trust may have an annual requirement to file both Form 3520 and 3520-A. Failure to file these forms may result in significant fines and penalties. If you have an ownership or interest in a foreign trust, here are six things you should know about foreign trust reporting and penalties.

Two Main Forms: 3520 and 3520-A

The two main tax forms that a US person may have to file when they have an ownership or interest in a foreign trust is the Form 3520 and Form 3520–A. Depending on the facts and circumstances of the situation, Taxpayers may have to file one or both forms. For example, when a US person has ownership of a foreign trust they file Form 3520 and Form 3520-A — but when the person is only a beneficiary of the foreign trust, they are (usually) limited to having to file Form 3520 to report the foreign trust — and only when they receive a distribution.

Two Different Due Dates and Extension Forms

Form 3520 is due when the filer’s individual tax return is due, including extensions. For example, if the person files an extension (such as Form 4868), then Form 3520 goes on extension as well — but Form 3520-A operates differently. Form 3520-A is due on March 15 (it can vary based on the trust’s tax year) and to seek an extension, the taxpayer has to file a separate form 7004 (substitute filing rules may apply).

Multiple Penalties for the Same Trust (Wilson)

It is very common for a taxpayer to both have ownership of a foreign trust, as well as be a beneficiary of the same trust. In this type of situation, the taxpayer may have to file both Forms 3520 and 3520-A. If the Taxpayer fails to file these forms,  the taxpayer may be penalized twice for failing to report for the same trust. This was the outcome in the case of Wilson.

Assessable Penalties are Different Than Other Penalties

Forms 3520/3520-A are different than other forms when it comes to penalties as well. As with most international reporting form penalties, fines involving Forms 3520/3520-A are considered ‘assessable penalties.’ This means that the first notice of non-compliance that the taxpayer receives about the penalty will be the actual penalty notice — usually by way of receiving a CP15 Notice. This is different than other penalties in which the taxpayer may be under audit or examination — and was already on notice that a potential penalty may be assessed (and could formulate a strategy from the get-go). There are various procedures available for taxpayers to pursue in order to try to abate the penalty.

Exceptions and Exclusions

The primary exclusions for having to file forms 3520/3520-A involve foreign pensions — which technically are considered foreign trusts (based on the relationship between the owner of the trust, the trustee/administrator, and the beneficiaries of the trust). It is important to note that not all foreign trusts require the taxpayer to file Forms 3520 and 3520-A. For example, Revenue Procedure 2014-55 provides for a specific exception for Canadian retirement trusts (RRSP and RRIF) as well as Revenue Procedure 2020–17 — which eliminates the reporting of certain retirement and non-retirement tax-deferred saving trusts, if they meet certain requirements — although FBAR and FATCA are still required.

Penalty Waivers and Abatement

When a person has been issued penalties, there are various procedures a Taxpayer may use to avoid, minimize, or abate penalties. The IRS recently released Notice 2022–36 in late August 2022 which serves to eliminate or avoid penalties for late-filed Forms 3520 and 3520-A. Otherwise, taxpayers should consider using one of the offshore disclosure programs to try to minimize or avoid foreign trust penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically FBAR penalties and IRS offshore disclosure & compliance. 

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