Form 3520 and Form 3520-A
Form 3520 and Form 3520-A are how a U.S. person reports a foreign trust. The penalty is often larger than the tax. The harder question is usually earlier: who is a U.S. owner, what counts as a distribution, and which part of the form applies. We advise on that legal classification and coordinate with the CPA who prepares the return.
Section 6048 is the reporting statute. Section 6039F is the separate rule for large foreign gifts, which are also reported on Form 3520. The trustee's residence does not decide who has the duty. A non-U.S. settlor of a classic FGT is not the filer. The U.S. persons are.
A U.S. person files Form 3520 for a reportable event under section 6048(a) — creating a foreign trust or transferring property to one — and for a distribution under section 6048(c). The same form reports certain large gifts and bequests from foreign persons under section 6039F. For a calendar-year individual the form is due on the fifteenth day of the fourth month after year-end, on the same extension as the income-tax return, and it is filed separately from Form 1040. Distributions from an FGT that are treated as gifts from the foreign grantor are often Part IV (foreign gifts), not the trust-distribution section. Getting that part wrong is a common failure. See Forms 3520 and 3520-A: who files, deadlines, and mistakes.
Section 6048(b) requires an annual information return when a U.S. person is treated as the owner of a foreign trust under the grantor rules. The U.S. owner is responsible for seeing that Form 3520-A is filed. For a calendar-year trust it is due on the fifteenth day of the third month — March 15 — with a six-month extension on Form 7004. U.S. beneficiaries, without more, do not make the trust file Form 3520-A. If the foreign trustee will not sign, the practical response is a substitute Form 3520-A filed with the owner's Form 3520. Whether that filing avoids the penalty is a reasonable-cause question for the tax adviser under section 6677(d).
A U.S. person who receives an FNGT distribution needs a Foreign Non-Grantor Trust Beneficiary Statement to allocate the amount between current distributable net income, accumulated income, and corpus. Without it, the instructions treat the distribution as an accumulation distribution. That default is a reporting fact and a tax fact. Counsel's job is to get the trustee to a statement the tax adviser can use, or to tell the family honestly that the records do not exist. See U.S. Beneficiaries of Foreign Trusts and The Throwback Rule.
Families treat a wire from "father's trust" as a private gift and skip Form 3520 once the amount passes $100,000 from a foreign individual or estate. They assume the offshore trustee filed Form 3520-A. They calendar 3520-A to April 15. They miss section 643(i), so a loan or the rent-free use of a trust apartment is never reported as a distribution. In the year the grantor dies, they keep using gift reporting after the trust has become an FNGT. Indirect transfers — a gift to a foreign relative who funds the trust — are another version of the same miss. None of these requires a controversy. They require someone to read the deed before the return is drafted.
Section 6677 imposes a civil penalty for a failure under section 6048. For Form 3520 reportable events and distributions, the penalty is the greater of $10,000 or 35 percent of the gross reportable amount. For Form 3520-A, it is the greater of $10,000 or 5 percent of the gross value of the portion of the trust owned by the U.S. person at year-end. After IRS notice, further $10,000 amounts can accrue for each 30-day period, capped by the gross reportable amount. Reasonable cause is an exception, not a hope. Large foreign gifts that are omitted from Form 3520 are penalized separately under section 6039F — 5 percent of the gift per month, up to 25 percent — not under the 35 percent rule. The CPA computes the penalty exposure. We do not soften the statute in the engagement letter.
The tax adviser prepares Form 3520 and Form 3520-A, computes DNI and UNI, applies the throwback computation, and files the extensions. Counsel reads the instrument: whether anyone is a U.S. owner under sections 671 through 679 and 672(f), whether the trust is foreign under section 7701, whether a loan is a distribution, and whether a protector's powers change the answer. If the filing position and the deed disagree, the form is not the thing to fix first. Families who only need a return prepared should hire the CPA. Families whose deed, trustee, and return describe three different trusts should hire both, with one scope each. The foreign-trust practice is described on Foreign Trusts. Advisers introducing a matter can start at Counsel for wealth advisers.
The painful 3520 files we see are rarely a mystery about a line on the form. They are a trust that was an FGT in conversation and an FNGT on the deed, or a U.S. child who has been receiving wires for three years, or a trustee who will not produce a beneficiary statement because no one asked while the grantor was alive. The remedy is to reconstruct the powers, the transfers, and the distributions, and then to let the tax adviser file what that record supports — including, where it is available, a reasonable-cause explanation. We do not try the penalty in court. We put the legal file in a state the CPA can use.
En español: obligaciones de Form 3520 y Form 3520-A cuando la familia tiene un foreign trust.
Tell us who in the family is a U.S. person and whether a return has already been filed. If you are the CPA or the wealth adviser, say so. We will tell you whether the next step is counsel, the preparer, or both.