Owning a trust can be a rewarding experience, but it does come with a large number of responsibilities. Aside from your fiduciary duties to any beneficiaries, you’re also responsible for disclosing your ownership to the IRS––and reporting on the trust’s financial activities. This is where IRS Form 3520-A, or “Annual Information Return of Foreign Trust With a U.S. Owner”, comes in. So, to help you with your reporting obligations, here’s a rundown of what IRS Form 3520-A is, how to complete the form, and what happens if you have concerns about any tax reporting issues related to the return.
What Is IRS Form 3520-A?
Form 3520-A is an IRS information return, completed by the trust, to provide the IRS with details of any U.S. persons with ownership interests in foreign trusts.
- Form 3520-A discloses U.S. beneficiaries in foreign trusts alongside U.S. owners
- Trust owners use the form to provide details of the trust’s transactional history for the tax year, including details of income accrued
- Although Form 3520-A is technically completed by the trust, it’s up to the U.S. owners to ensure compliance
Think of IRS Form 3520-A as the trust’s financial statement for the applicable tax year.
Why Does Form 3520-A Matter?
As per the form’s official instructions, the IRS wants to know if you have any interests in foreign trusts for one simple reason––concerns around tax evasion. If U.S. individuals don’t fully disclose their overseas interests, including trust ownership, they could face serious personal scrutiny around their own tax affairs. In some cases, they could even face financial or criminal penalties.
Completing Form 3520-A is a mandatory part of owning a foreign trust, but it’s also a key way to ensure you’re doing everything possible to stay fully transparent with the IRS. It’s a critical part of your overall tax planning for the year and shouldn’t be overlooked.
Form 3520 and Form 3520-A: What’s the Difference?
It’s really easy to confuse Form 3520 and Form 3520-A since they are so closely linked. But they are different in key ways––here’s what you need to know.
- Form 3520: This is an information return disclosing an interest in a foreign trust. It can be ownership but it can also be receiving a benefit or sending assets overseas.
- Form 3520-A: This is, essentially, an annual statement or record of a trust’s financial activities. It’s completed by a foreign trust owner with at least one U.S. beneficiary.
So, there are key differences in not only the purpose behind Forms 3520 and 3520-A, but also in who must file the forms and why.
Do I Need to File Both Form 3520 and Form 3520-A?
It’s possible, depending on your circumstances. For example, if you own a foreign trust, and there’s a U.S. beneficiary, you may need to complete both. Or if, as another example, you own a foreign trust with a U.S. beneficiary, and you receive an unrelated foreign gift, you should complete both.
Unsure if you’re liable to complete both Form 3520 and Form 3520-A? Our team can help you understand your tax disclosure requirements.
Who Should File IRS Form 3520-A?
Any U.S. owner of a foreign trust, no matter how large your share of ownership, is responsible for ensuring the trust completes and files Form 3520-A on time. So, the trust files the form, but the onus is on the trustee to complete the form.
What does this mean for you? Well, if you own even a very small portion of a foreign trust, it’s on you to complete Form 3520-A and to also provide U.S. beneficiaries with any required annual financial statements.
Exceptions to Filing Form 3520-A
Although the default position is that U.S. foreign trust owners have Form 3520-A obligations, it’s not always the case. For example, you may be exempt from completing Form 3520-A if it’s a tax-favored foreign retirement trust, or if it’s a Canadian registered retirement savings plan (RRSP) or registered retirement income fund (RRIF).
Unsure if you have IRS Form 3520-A filing obligations? Don’t worry. Simply contact our tax team and we’ll help you understand your responsibilities.
What Is the Form 3520-A Deadline?
This is where matters get a little confusing. The deadline is not set in stone. Rather, it depends upon which tax year the trust follows.
- Form 3520-A is due on the 15th day of the third month of the trust’s tax year.
- Calendar year trusts, then, have until March 15th to file.
- Trusts subject to foreign tax years have different filing deadlines. For example, the UK tax year ends on April 5, meaning Form 3520-As for trusts following the UK tax year are due on July 15.
If the trust doesn’t file on time, then the owner must file 3520-A alongside their own Form 3520 tax return. This means filing on:
- March 15, for the majority of U.S. residents and citizens
- June 15, for U.S. citizens and residents living abroad
Different deadlines may apply if the IRS grants an extension. Check with the Gordon Law tax professionals if you’re at all unsure which deadline applies.
Can I File Form 3520-A Late?
If you’re going to be late filing Form 3520-A, let the IRS know. Request an extension to the filing deadline by completing Form 7004 and submitting this to the IRS.
Note that even if you’ve already sought an extension for a related return, or an income tax return, you still need to seek an extension for filing Form 3520-A late separately. And you need to provide the foreign trust employer’s identification number (EIN) rather than any other personal taxpayer ID number.
What Are the Penalties for Filing Form 3520-A Late?
There’s no penalty if you submit Form 3520-A within the extended deadline, assuming you filed Form 7004. However, if you simply file late without seeking an extension, the IRS could impose a penalty of $10,000 or 5% of the gross value of the trust assets falling under your ownership––whichever is the greater amount.
If you don’t remedy the issue within 90 days of the IRS notifying you of a late payment penalty, they could impose even more penalties. And the greater the penalties, the higher the risk you’ll end up facing tax debt now or in the future.
What if I Forget to File Form 3520-A?
If you ignore Form 3520-A, the penalties are the same as those imposed if the form is submitted late. But the IRS may take further action if they suspect that you deliberately or wilfully ignored the filing deadline, or if they’re concerned that you’re concealing assets. They may also perform a tax audit of your personal income tax return.
Have you received an IRS penalty for Form 3520-A non-compliance? If you can show that you truly acted innocently, and made an honest mistake, the IRS could reduce or even waive the penalties. But IRS negotiations can be tricky, and you only get one shot at making your case. Give yourself the best chance of reducing or waiving IRS penalties by contacting the Gordon Lat tax team.
How Should I Complete Form 3520-A?
Although Form 3520-A looks daunting at first glance, it’s less intimidating if we break it down section by section.
Complete the General Information Section
The first part is simply asking you to outline the trust’s main details including:
- Name of the trust
- Trust address
- Trust creation date
- Names and details of U.S. agents (if any)
- Employer identification number
This section may appear a little lengthy, but it’s actually fairly simple to complete if you have all of the relevant information to hand.
Detail Foreign Trust Income
Next, you need to set out any income received by the trust, and any expenses paid, during the financial year.
Examples of income to include are:
- Rents
- Royalties
- Capital gains
- Dividends
- Ordinary gains
And you’ll want to include expenses such as:
- Advisor fees
- Charitable contributions
- Taxes
- Interest expense
You should also include the fair market value (FMV) of any deductions made to beneficiaries during the year.
Provide the Balance Sheet
The balance sheet is where you list the trust’s assets and liabilities. The goal is to show what the trust is worth once liabilities, such as debts and professional fees, are deducted from assets such as money, investments, and property.
The balance sheet is a critical part of any Form 3520-A. If you’re unsure what to include, or how to itemize the records correctly, contact our tax professionals for help.
Complete the Foreign Grantor Trust Beneficiary and Owner Statements
Every beneficiary, and every owner, receives their own copy of the information most relevant to them. So, for example, beneficiaries receive a note of any distributions they’ve received, and owners receive a note confirming their stake and their share of any relevant expenses and deductions.
Filing is considered incomplete if these statements aren’t provided, or if copies aren’t provided to the IRS.
Finalize Form 3520-A
Once Form 3520-A is complete, all that’s left to do is complete the declaration. This part simply confirms that the form is accurate, to your knowledge, and that it’s a true representation of both the trust’s activity and your ownership interest.
What if My 3520-A Is Wrong?
It’s possible to submit an amended Form 3520-A if you realize you’ve made mistakes completing the return. Just remember to select the “Amended Return” box at the top of the form to ensure the IRS knows it’s a second return.
Will the IRS accept the amended return? Most likely, but it could leave you open to increased scrutiny. They could even impose tax penalties, especially if they suspect you acted negligently when completing the form.
If you realize you’ve made a mistake completing Form 3520-A, it’s crucial you act quickly to resolve the issue. Don’t hesitate to contact our tax professionals if you’ve spotted a mistake and you’re unsure what to do next.
How Do I File Form 3520-A?
When you’re ready to file Form 3520-A, you send it by physical post just as you would a completed Form 3520. The address to use is:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Since there’s no scope to send the completed return electronically, it’s vital that you leave yourself time for any postal errors. So, send the return to the IRS in time to meet the deadline––including any extended deadlines.
Can a Tax Professional Help Me File Form 3520-A?
Yes. Although you don’t need to hire professional help before filing IRS returns, an experienced tax team can offer invaluable support and guidance during tax season and beyond.
- Tax laws change frequently, and the implications for your tax liabilities can be significant. Tax professionals will ensure you act with the latest rules and guidance in mind.
- If the IRS decides to inspect your return more closely, or even propose penalties, they move fast––and they have their own legal team on side to help. You deserve your own dedicated counsel acting with your best interests in mind.
- Information returns, especially foreign information returns, can significantly affect your tax liabilities. A tax professional can help you pinpoint ways to reduce your overall tax liability and identify strategies for improving your financial planning.
- Tax returns, including Form 3520-A, are complicated. Your tax team will provide personalized advice tailored to your specific situation so you can file your return with ease. We can also help you with any wider offshore asset tax issues you may have.
Don’t feel obliged to handle the stress of filing Form 3520-A alone. Instead, turn to the Gordon Tax team for advice and know you’re doing everything possible to meet your IRS disclosure obligations.
Unsure How to File Form 3520-A? Call Gordon Tax Today!
Do you need help completing Form 3520-A or managing any other tax issue? Then contact our tax professionals. Our experienced team has the knowledge, commitment, and experience to guide you through any tax matter, whether you’re unsure how to prepare your tax return or you’re facing IRS penalties. Whatever the issue, there’s no need to face it alone. Let us walk you through filing Form 3520-A with ease. Call us now or contact us online to learn more about our tax services.