Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A Annual Information Return of Foreign Trust with a U.S. Owner are both informational returns which must be filed with respect to foreign trusts and receipt of foreign gifts. To have a filing requirement generally depends on (1) whether the filer is a “U.S. person,” (2) whether the foreign entity is classified as a trust for U.S. tax purposes, (3) whether the trust is a foreign trust for U.S. tax purposes and (4) whether the U.S. person is required to file pursuant to the respective rules of the information returns.
Form 3520 is due when an individual’s income tax return is due, extensions included. Specified transactions with foreign trusts, distributions from foreign trusts, and receipt of specified large gifts from foreign persons are reported on Form 3520. The penalty for failure to file Form 3520 is the greater of: $10,000; 35% of the gross value of any unreported property transferred to a foreign trust; 35% of the gross value of unreported distributions received from a foreign trust; or 5% of the gross value of the unreported portion of the trust’s assets. Penalties for failure to report foreign gifts are equal to 5% of such amount of the gift for each month the failure continues, up to a maximum of 25%.
Form 3520-A must be filed by the 15th day of the 3rd month after the end of the trust’s tax year or within 90 days of a reportable event. IRC § 6048(a). Reportable events include the creation of a foreign trust, the transfer of any money or property to a foreign trusts and the death of a citizen or resident of the United States who owned a foreign trust or had a portion of a foreign trust includable in their gross estate. The penalty for failure to timely file a Form 3520-A is the greater of: $10,000 or 5% of the gross value of the trust. For a continued failure to file beyond 90 days after receiving an IRS notice regarding the failure, the penalty is an additional $10,000 for each 30 day period it persists (subject to limitations).
Some confusion had previously existed between whether the reporting required under Form 3520-A was actually due within 90 days of a reportable event or on the 15th day of the 3rd month after the end of a trust’s tax year. IRS Office of Chief Counsel Memorandum Number 201208028 discussed this issue and noted that the more “generous” deadline in the Form 3520-A instructions (the 15th day of the 3rd month after the end of the trust’s tax year) would be acceptable in meeting the requirements of the reporting and avoiding penalties.
At this time, no guidance exists to deal with the Form 3520 filing deadline when there is no filing obligation for a U.S. tax return. If you have failed to file information returns regarding foreign assets in the past, there are several ways to come into compliance.
