What is the Difference Between form 3520 and 3520-A

Difference Between Form 3520 and Form 3520-A

International reporting of foreign accounts, assets, and investments to the IRS can be very complex. And, two of the most common international reporting forms taxpayers may have to file are Form 3520 and Form 3520-A — which involve the reporting of foreign trusts, gifts, and inheritances in accordance with Internal Revenue Code sections 6039 and 6677(a). More specifically:

• • • • • 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.”

Both 3520 forms involve foreign trust reporting. But Form 3520 also includes foreign gift and inheritance reporting as well.  The due dates for filing the forms are different — and so are the methods for requesting an extension. Moreover, international reporting penalty enforcement is on the rise, and the failure to file these two forms may result in significant fines and penalties — noting, that the IRS has also developed various international tax amnesty programs to assist taxpayers with safely getting into compliance.

Difference Between Form 3520 and Form 3520-A

Who Has to File Form 3520 and 3520-A?

The Form 3520 is used by U.S. Persons who engage in certain foreign trust and gift transactions.  First, when a U.S. Person receives a gift or inheritance from a foreign person that exceeds the threshold for reporting, the U.S. person must file Form 3520. In addition, if the U.S. person either has an interest in a foreign trust or received a distribution from a foreign trust — or engages in certain other trust-related transactions — they must also file the form. With Form 3520-A, the filing is required when there is a Foreign Trust with a U.S. owner. The IRS has developed various exceptions and limitations for reporting, such as the Canadian RRSP (Registered Retirement Plan), and a more general reporting limitation in accordance with Rev. Proc 2020-17.

Date of Filing of Form 3520 vs. 3520-A

Filing the Form 3520 coincides with individual tax return filing.  In other words, Form 3520 is due when a person’s tax return is due to be filed. Even if the person does not have to file a Tax Return, they still must submit Form 3520, if applicable. The Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s tax year; for most people, the Form 3520-A is due on March 15.

Requesting an Extension

To request an extension to file Form 3520, the person files for a regular extension with their tax return (usually on Form 4868).

• • • “If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year.”

The Form 3520-A has more specific requirements. To request an extension:

• • • “An automatic 6-month extension of time to file Form 3520-A (including the statements on pages 3 through 5) may be granted by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, by the 15th day of the 3rd month after the end of the trust’s tax year.”

Form 3520-A Due Date if the Trustee Does Not File the Form

The due date for Form 3520-A can change if the Trustee does not timely file the Form 3520-A timely.

• • • “If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, 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 penalty for the foreign trust’s failure to file a Form 3520-A.”

Common Form 3520 and 3520-A Reporting Examples

While Form 3520 is also used to report large foreign gifts and inheritances (and the reporting is relatively straightforward), when it comes to reporting foreign trusts, the Forms can become much more complicated to prepare. But, not all taxpayers are required to file both Form 3520 and Form 3520-A in the same year. Let’s look at a few common examples to distinguish between who has to file Form 3520 and Form 3520-A.

Dana Received a Large Foreign Gift

Dana is a U.S. person who recently received a $700,000 gift from her grandma who is a non-resident alien. The gift was cash from a foreign bank account that was transferred into a U.S. bank account. Since Dana received a large foreign gift, she is required to file Form 3520. However, because Dana is not the owner of a foreign trust, Dana is not required to file form 3520-A.

Adam is Trustor and Beneficiary of a Foreign Trust

Adam is a U.S. person who previously lived in a foreign country. Before relocating to the United States and becoming a U.S. Person, Adam was the owner of a foreign trust that he used to manage his foreign investments. Adam was also one of the beneficiaries of the foreign trust — but only one of several beneficiaries. In the current year, Adam did not receive any distributions. Since Adam is the owner of a foreign trust, he is required to file Forms 3520 and Form 3520-A, even though he did not receive any trust distributions.

Miranda is a U.S. person/Beneficiary of a Foreign Trust

Miranda is a U.S. Citizen although several of her family members live overseas and are not U.S. persons for tax purposes. Recently, Miranda’s aunt created a trust in which Miranda is a beneficiary. In the current year, Miranda received a trust distribution of $5,000.  In this example, Miranda does not own the foreign trust and does not have any ownership of any assets in the foreign trust, so she is not considered an owner of the foreign trust — and does not need to file Form 3520-A. However, since Miranda did receive a trust distribution, she is required to file Form 3520.

Scott Received a Foreign Inheritance

Scott is a U.S. person who has family members living overseas who are non-us persons. Scott received it for an inheritance of $300,000. In this example, Scott is required to file Form 3520 because he received a foreign inheritance, but since he does not have any ownership of a foreign trust, he’s not required to file Form 3520-A.

Dean is a Discretionary Beneficiary of a Foreign Trust

Dean is a US person who has family members living overseas paired with one of his family members who created a foreign trust in which Dean is a discretionary beneficiary. In the current year, Dean did not receive any distributions from the foreign trust. In this situation, Dean is not required to report either Form 3520 or Form 3520-A because he is not the owner of the foreign trust and did not receive any distributions.

Peter owns a U.S. Trust with Foreign Assets

This is where it begins to get complicated. In this example, Peter is a U.S. person who has ownership of a U.S. trust but he also has foreign assets located in his U.S. trust, such as foreign property and some investments which generate income. Even though technically the trust is considered a U.S. trust, since a portion of the trust is considered foreign Peter may be required to file Form 3520 andFform 3520-A since he is the owner of the trust, which also contains foreign assets.

Late Filing Form 3520/3520-A Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520-A and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.