Form 3520 and Form 3520-A are the information returns that attach a foreign trust to the U.S. tax system. Families treat them as a CPA problem that appears in March. They are a CPA problem, and they are also a reading of the trust instrument. Section 6048 tells a U.S. person to report certain creations, transfers, ownership, and distributions. Section 6039F tells a U.S. person to report large gifts and bequests from foreign persons, on the same Form 3520. The trustee's letterhead does not decide who has the duty.
This note is about who files, when, and where the filings usually go wrong. It is not a preparation guide and it is not tax advice. We advise on the legal classification the forms report. The family's tax adviser prepares the returns. The practice page is Form 3520 and Form 3520-A. The trust engagement is Foreign Trusts.
Who files Form 3520
Three U.S. persons show up on Form 3520, and they are not always the same person. Under section 6048(a), a U.S. person who creates a foreign trust or transfers property to one reports the event. Under section 6048(c), a U.S. person who receives a distribution from a foreign trust reports the distribution. Under section 6039F, a U.S. person who receives a gift or bequest from a foreign person above the threshold reports that amount. A distribution from a foreign grantor trust that is treated as a gift from the non-U.S. grantor often belongs in the foreign-gift section, not in the trust-distribution section. The threshold for gifts and bequests from a foreign individual or a foreign estate is $100,000. Gifts from a foreign corporation or foreign partnership use a lower, indexed amount. Below the threshold, a true gift from a foreign individual may not be reportable. Above it, "it was a gift from my father" is not an exemption.
A non-U.S. settlor who is not a U.S. person does not file Form 3520. The children who are U.S. persons do, when they receive a reportable amount or when they themselves transfer property in. A U.S. person who is treated as the owner under sections 671 through 679 also has Form 3520 items, separate from the trust's own return. The classification that sorts these roles is discussed in FGT vs. FNGT for International Families.
Who is responsible for Form 3520-A
Form 3520-A exists when a U.S. person is the owner of any portion of a foreign trust for the year, under the grantor rules. Section 6048(b) puts the responsibility on that U.S. owner, whether or not the foreign trustee is willing to sign. U.S. beneficiaries, by themselves, do not create a 3520-A duty. A foreign grantor trust whose only owner is a non-U.S. person under section 672(f) generally has no U.S. owner and therefore no Form 3520-A, even if U.S. children receive distributions that they must report as foreign gifts.
That distinction is the one families miss after the settlor dies. Grantor status ends, the trust becomes a foreign non-grantor trust, and Form 3520-A still does not appear unless some U.S. person is an owner — for example under section 679, if a U.S. person transfers property to the trust and there is a U.S. beneficiary. What does appear is Form 3520 on the distribution, now as a trust distribution rather than as a gift. See When the Foreign Grantor Dies and, in Spanish, las obligaciones de Form 3520.
Deadlines, including the one that is not April 15
Form 3520-A is due on the fifteenth day of the third month after the trust's year ends. A calendar-year trust files by March 15. Form 7004 extends that due date by six months. Form 3520 is due on the fifteenth day of the fourth month after the U.S. person's year ends — April 15 for most individuals — and it follows an extension of the income-tax return. It is not filed as an attachment to Form 1040. A U.S. owner who waits for the personal return and has not extended Form 3520-A is already late on the trust return.
If the foreign trustee will not sign Form 3520-A, the U.S. owner files a substitute Form 3520-A with the owner's Form 3520. The instructions describe that path. It is the practical response. It is not an automatic waiver of the penalty. Reasonable cause under section 6677(d) is a separate showing, and the fact that a foreign law might punish disclosure is not reasonable cause.
Mistakes that repeat
The distribution is reported on the wrong part of Form 3520, so a gift from a living foreign grantor is described as an accumulation distribution, or a post-death FNGT distribution is described as a gift. The trustee never issues a Foreign Non-Grantor Trust Beneficiary Statement, and the beneficiary's preparer either invents an allocation or, correctly and harshly, treats the entire amount as an accumulation distribution. See The Throwback Rule and U.S. Beneficiaries of Foreign Trusts.
Loans are the quiet version. Section 643(i) can treat a loan of cash or marketable securities from a foreign trust to a U.S. grantor or U.S. beneficiary, and the uncompensated use of trust property, as a distribution unless the obligation qualifies. A mortgage the trust made to a U.S. child, or a year in the family's Miami apartment that the trust owns, belongs on the same checklist as a wire.
Indirect transfers belong there too. Funding a foreign trust by giving cash to a relative who then settles the trust does not step outside section 6048 or section 679 because the U.S. person did not sign the deed. The preparer cannot see that from the wire advice alone. Someone has to ask who decided, and whose money it was.
Penalties sit on top of all of this, and they do not require an underpayment of income tax. Section 6677 uses the greater of $10,000 or 35 percent of the gross reportable amount for Form 3520 failures tied to sections 6048(a) and 6048(c), and the greater of $10,000 or 5 percent of the year-end value of the portion owned by the U.S. person for a Form 3520-A failure. Further amounts can accrue after IRS notice. Omitted foreign gifts are penalized under section 6039F — 5 percent of the gift for each month, up to 25 percent — which is a different statute from the 35 percent rule. The landing page states the same penalties for clients who are not reading a filing note. The computation is the tax adviser's.
What to put in the file before anyone signs the return
A usable file has the trust instrument, any deeds of amendment, a list of who can exercise distribution, investment, and trustee-removal powers, the residence of those people, and a ledger of contributions and distributions for each open year, including loans and use of property. It also says, in one paragraph, whether any U.S. person is an owner. If that paragraph cannot be written, the return is early and the legal reading is late. Counsel and the preparer should agree which of them owns that paragraph. The form is not the place to discover it.