If you have any interests in a foreign estate or trust, or you receive a foreign gift, then you may need to complete IRS information return 3520. Formally known as the “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”, Form 3520 is how you disclose any interests you have in large foreign assets or foreign trusts––so you can complete an accurate income tax return. But how does Form 3520 work, who must file this return, and how does it affect your tax liability? Let’s take a closer look at the answers to these questions and more below.
What Is IRS Form 3520?
IRS Form 3520 is an information return which discloses your ties to foreign monies, trusts, or property. As it’s an information return, rather than a tax return, it doesn’t directly report the tax you owe, but it does report your income which is used to calculate tax owed.
- The IRS uses Form 3520 to monitor ownership of foreign trusts and assets, or the transfer of large foreign sums overseas.
- Completing Form 3520 is crucial to your overall tax compliance if you have a certain level of interest in trusts, estates, or income from overseas.
- If you don’t file Form 3520 when required, it could trigger penalties, IRS scrutiny, or even a future tax audit.
Put simply, think of Form 3520 as a means of disclosing overseas transactions or ownership in foreign trusts. It’s a key way of ensuring that you stay compliant with IRS rules and preventing accusations of tax evasion involving overseas transfers.
How Does Form 3520 Work?
Although seemingly lengthy, the form is not so daunting once you better understand how it works.
The first section is simply where you provide your personal details, or other relevant information such as trust information or the name of any decedent if there’s an inheritance involved.
Next, you complete one or more of four Form 3520 parts. The parts are as follows.
1. Transfers to Foreign Trusts
Any transfer of funds or property made to a foreign trust must be disclosed in this part. This includes less direct benefits made to the trust, such as a loan.
2. U.S. Ownership of Foreign Trusts
Any owner of a foreign trust completes this section––even if there’s no financial activity that year, there’s an automatic duty of disclosure just by owning the trust.
3. Foreign Trust Distributions
Any distributions made by a foreign trust to a U.S. individual, such as money, property, or even a loan, should be disclosed in this section.
4. Large Foreign Gifts Received
Foreign gifts exceeding $100,000 in value, including gifts from corporations and partnerships, should be included in this section.
Are There Tax Benefits to Filing IRS Form 3520?
You might be obliged to file IRS Form 3520, but that doesn’t mean there are no benefits to you for doing so.
- Typically, the IRS only has three years from the date a tax return is due to audit the return and propose adjustments. By filing a complete and accurate Form 3520 as soon as possible, you’re taking steps to reduce the time available to the IRS to audit your return.
- Completing and filing Form 3520 helps you better understand your taxable income, reducing the likelihood of future tax debt.
- Filing Form 3520 is a key step in avoiding tax penalties or accusations of concealing taxable foreign income.
In short, consider filing IRS Form 3520 as a key part of your overall financial planning.
Who Should File IRS Form 3520?
There are, typically, three scenarios which may trigger filing a Form 3520. These scenarios are:
- You receive money, property, or another financial benefit e.g. a loan from a foreign trust
- You own a foreign trust even if it made no transfers that financial year
- You received a large foreign gift, or multiple foreign gifts, worth $100,000 or more
- There are distributions from a foreign trust, including loans and less obvious benefits such as covering expenses
Unsure if you need to complete Form 3520? Ask our tax team for help.
Joint Returns for Spouses
It’s possible for spouses to file a joint Form 3520 if they’re filing a joint income tax return, and they’re both beneficiaries, transferors, or granters of the same foreign trust. This means you need to file separate returns if your return relates to different trusts.
Form 3520 vs. Form 3520-A: What’s the Difference?
It’s easy to confuse Form 3520 and Form 3520-A since they share a similar purpose. But Forms 3520 and Form 3520-A differ in who files each form and why they file them.
- Form 3520: Filed by U.S. owners of foreign trusts and U.S. beneficiaries of foreign gifts, transactions, and distributions.
- Form 3520-A: Filed by a U.S. owner of a foreign trust with at least one U.S. beneficiary to report the trust’s transactions.
So, you file Form 3520 if you have an interest in, or benefit from, foreign trusts, gifts, or inheritances, and you file Form 3520-A if you manage a foreign trust with at least one U.S. beneficiary.
Exceptions to Filing Form 3520: Could I Be Exempt?
It’s possible, yes––not all transfers to and from foreign trusts require Form 3520 reporting. In fact, there are various exceptions to the filing rule. While it’s best to check with our tax professionals before assuming you are exempt from filing, you could be exempt if the transactions involve:
- Fair market value property transfers
- Transfers falling below certain value thresholds (for example, very small overseas transfers)
- Canadian retirement plans, such as Registered Retirement Income Funds (RRIFs) and Registered Retirement Savings Plans (RRSPs)
- Distributions from foreign trusts already taxable for services rendered
- Certain foreign charitable trust transfers
- Trusts formally recognized by the IRS, in writing, as income tax exempt
The IRS has an extensive––and complex––list of exemptions which our team can help you understand.
What Is the IRS Form 3520 Filing Deadline?
Luckily, the IRS rules are simple here.
- U.S. Residents and Citizens: April 15 (the standard deadline for individual tax returns for the relevant tax year).
- U.S. Citizens or Residents Living Abroad: June 15
You can request more time to file with the IRS if you suspect you won’t make the deadline, which gives you until October 15 to file––this deadline is firm and cannot be extended.
Worried you can’t file on time? You could face an IRS audit for the relevant tax year if you don’t submit a Form 3520 by the due date, or the extended date if you seek an extension. And you could face tax penalties, too. Contact our team immediately if you’re concerned about meeting your IRS Form 3520 obligations and we’ll help you explore your options.
How Do I File IRS Form 3520?
You can’t file Form 3520 online. Instead, you should send your completed information return to:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Submitting close to the deadline? Leave sufficient time for the IRS to receive your return or else it might be considered late. And you need to include all the relevant parts of your return, including any supporting records if required. Otherwise, it’s considered an incomplete return and you may need to submit a fresh return.
Need more time to file? Remember, you can seek an extension from the IRS. Otherwise, you risk IRS failure to file penalties which can be significant.
How Do I Complete Form 3520?
Form 3520 can seem lengthy and daunting, so let’s break down how to proceed.
- First, gather any records you have documenting foreign transactions. These records include appraisals, trust agreements, donor details, and dates and values of any transfers.
- Provide your own contact information and personal details, such as your taxpayer identification number, so the IRS can clearly identify you.
- Next, provide as much detail as possible on the form. So, you might need to include a donor’s identity and contact details. Or, you might need to break down transfers made to a foreign trust and your role in each transfer e.g. beneficiary, grantor.
- Finally, complete the right section(s). For example, if you receive a large gift from overseas, you complete Part IV. And if you own a foreign trust, complete Part II.
It’s always best to provide more information than less. Meaning, if you’re unsure whether information is useful or necessary, err on the side of caution and include it or ask our team for help first.
Happy with your Form 3520? Now it’s time to file.
What Happens if I Ignore Form 3520?
It’s not a good idea to ignore Form 3520. The IRS, by default, will impose financial penalties if they suspect a person deliberately neglected to file a return, or deliberately concealed income on their return. For example, the IRS may impose an initial penalty of $10,000 or a percentage of the asset’s gross value––whichever is the greatest.
- Ignoring Form 3520 leaves your entire tax return open to IRS scrutiny, as they may have concerns around possible tax evasion.
- Even if you submit your form late, it’s far better to send a late return, and a letter of explanation to the IRS, than ignoring the form entirely.
It’s tough negotiating with the IRS. If you’re facing penalties for a failure to file Form 3520, contact our tax professionals immediately to discuss your options for proceeding.
Challenging IRS Penalties
Thankfully, the IRS no longer automatically imposes penalties for Form 3520 errors if the individual can show they acted innocently. This comes down to showing “reasonable cause”. Meaning, if you can show you made an honest mistake or oversight, or you were genuinely prevented from complying with your obligations, then the IRS could waive penalties.
Examples of what might constitute a “reasonable cause” include:
- Serious illness
- Death of a spouse or dependent
- Inability to access necessary records due to circumstances beyond your control
- Genuine misunderstanding of the law, considering your level of education or experience
It’s helpful to have evidence supporting your penalty appeal, and to show that you attempted to comply as soon as possible. Our team will walk you through what steps to take if you have an urgent tax problem or pending IRS penalties.
Can I Correct an Incorrect Form 3520 Return?
Yes. Maybe you forgot to include an asset or made a miscalculation. No matter the mistake, you can file an amended return to address the issue.
- Start a new Form 3520.
- On page 1, Item A, select “Amended Return” so the IRS knows that it’s an amended return.
- Complete the new Form 3520 with the correct information.
- Submit the amended return––you may choose to include a letter of explanation of the error.
To be clear, filing an amended return doesn’t mean the IRS won’t penalize you if they suspect you acted negligently, or deliberately, when submitting the first return. But filing an amended return goes some way to showing you made an innocent mistake the first time around, which could mitigate any penalties you face. Should you need help, our tax professionals will explain your options and help you challenge IRS penalties.
Do I Need a Tax Professional to File Form 3520?
Undecided about hiring a tax professional to help you file IRS Form 3520? Here are just a few reasons why you should strongly consider consulting our tax team before you complete any part of your tax return.
- The rules around foreign gifts, trusts, and inheritances are complex and nuanced. Without personalized tax advice, you risk making avoidable mistakes—and incurring IRS penalties.
- Not only are tax rules complicated, but they are subject to change. A tax professional will ensure you are following the most up-to-date rules to reduce the risk of Form 3520 errors.
- There’s always the risk of an IRS audit on a tax return, especially on complex returns involving high-value cross-border transactions. A tax professional can guide you through the process, helping you negotiate with the IRS and challenge proposed tax adjustments.
- IRS Form 3520 can be time-consuming and stressful to complete. But with a tax professional on your side who can answer any questions you may have, it’s easier––and more efficient––to file your information return.
As tax professionals at Gordon Tax, we aren’t just problem-solvers. We provide bespoke, personalized tax advice to help our clients reduce their overall tax liability and plan effectively for the future.
Need Help Filing IRS Form 3520? Contact Us Today!
Have questions about declaring foreign income or unsure how to complete IRS Form 3520? That’s where the Gordon Tax professionals come in. Not only can we walk you through how to complete Form 3520 and how to comply with your reporting obligations, but we can help you with any related tax problem you might have, including how to reduce your tax bill, prepare your tax return, or challenge IRS penalties.