Who Should File Form 3520
Who Should File Form 3520? The IRS Form 3520 is used to report certain foreign transactions to the IRS. The Form 3520 is generally required when a U.S. person receives a gift, inheritance (a type of “gift”) from a foreign person, or a foreign trust distribution. There are certain threshold requirements for reporting the 3520 form, depending on whether the gift is from a foreign individual or entity. When it comes to Foreign Trusts, there is no minimum distribution; in other words, all distributions from a Foreign Trust to a U.S. person are generally reportable on Form 3520.
Who is Required to File?
As provided by the IRS:
“File Form 3520 if any one or more of the following applies.
1. You are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding. Responsible party, reportable event, qualified obligation, and person related to a foreign trust are defined later.
Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for Part I.
2. You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679. Complete the identifying information on page 1 of the form and Part II.
See the instructions for Part II. If you receive distributions from the foreign trust, 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. U.S. person and owner are defined later.”
Deadline for 3520 Form Filing
The deadline to File Form 3520 is the same as the deadline for filing an ordinary tax return (1040) — although the deadline to file Form 3520A is different. If a person files an extension to file their tax return, then the Form 3520 also goes on extension as well.
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.”
You Can Reduce or Avoid Form 3520 Penalties
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