Are you a U.S. citizen or resident who owns an overseas trust? Then you may be responsible for completing an IRS information return known as an “Annual Information Return of Foreign Trust With a U.S. Owner”, or Form 3520-A for short. It’s crucial that you complete this return accurately and within IRS filing deadlines or you risk increased IRS scrutiny––or even personal financial penalties. But how do you know if you need to file IRS Form 3520-A, and how do you go about completing the return? The Gordon Law tax team answers these questions and more below.
What Is IRS Form 3520-A?
Form 3520-A provides the IRS with information about a foreign trust with at least one U.S. owner. It is, in a sense, a financial statement. Form 3520-A sets out key details about the trust including, for example:
- Details of any U.S. beneficiaries
- Trust income and expenditure
- U.S. trust owner details
Completing Form 3520-A enables the IRS to understand, track, and monitor U.S. foreign trust interests.
What Is the Purpose of Form 3520-A?
Put simply, completing Form 3520-A in line with IRS instructions is a critical part of your overall tax planning. The IRS takes ownership of foreign trusts seriously. To avoid accusations of tax evasion or concealing foreign assets, it’s crucial to provide a full and accurate Form 3520-A on time to the IRS.
Importantly, IRS Form 3520-A is an information return, rather than a tax return. Information returns report transactions and other critical details to the IRS but they’re not used to calculate and pay tax. So, the purpose behind Form 3520-A is to fully disclose any interests in foreign trusts to the IRS, but the form in itself doesn’t directly impact tax liability.
What’s the Difference Between Form 3520 and Form 3520-A?
Confused about what makes Form 3520 and Form 3520-A different? Don’t worry, this is understandable. After all, the forms seem largely similar. But there are key differences between each form which can’t be overlooked.
- Form 3520-A: Completed by the trustee of a foreign trust with a U.S. beneficiary. The form is used to report the trust’s activities, including transactions between the trust and the U.S. beneficiary, and trust income.
- Form 3520-A: Completed by any individual with an interest in a foreign trust, whether this is ownership, receiving a gift, or making a transaction.
The key difference? Form 3520-A reports a trust’s financial activities. It’s like a financial statement. But Form 3520 discloses ownership or other interest in a trust. So it’s more about ownership transparency, and disclosing any potentially taxable income.
Who Should File IRS Form 3520-A?
You should complete Form 3520-A if you have any ownership interest in a foreign trust, no matter how small your interest. Although the trust is, technically, responsible for filing Form 3520-A, it falls to owners to ensure the form is submitted properly and on time.
You may be exempt from filing Form 3520-A if it’s a Canadian registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) or a tax-favored foreign retirement trust. However, most US owners of foreign trusts will have Form 3520-A obligations, so it’s crucial you know how––and when—to file.
Do I Need to File Both Form 3520 and Form 3520-A?
Possibly. If you’re treated as the owner of a foreign trust, then you must ensure the trust files Form 3520-A, and you may also need to file your own Form 3520 declaring your ownership. You may also need to file both if, for example, you own a foreign trust but you’re also a beneficiary of another foreign trust.
Knowing which forms to file, and when, can be complex. Don’t hesitate to contact our team if you’re unsure what reporting requirements you have.
What Is the Form 3520-A Filing Deadline?
Under IRS rules, Form 3520-A is due on the 15th day of the third month following the end of the trust’s tax year. So, for example, if it’s a calendar year trust, then the due date is March 15. But if, say, it’s UK trust, when the tax year ends on April 5, then Form 3520-A is due on July 15.
What if the trust fails to file the form? Then the trust owner must file Form 3520-A alongside the owner’s Form 3520 return by the Form 3520 due date. Form 3520, unless an extension is granted, is usually due on April 15. U.S. citizens and residents living abroad have until June 15 to file Form 3520.
Can I File Form 3520-A Late?
The IRS will accept Form 3520-As submitted beyond the typical deadline if you also submit a Form 7004. Form 7004 gives you an automatic six-month extension to file your information return, so if you suspect you will be late filing, request an extension as soon as possible.
To be clear, even if you’ve already sought an extension for another return—such as your income tax return––the IRS treats Form 3520-A separately. You need to provide the foreign trust employer’s identification number (EIN), too, so if you’re unsure what this number is, it’s crucial to find out before submitting.
If you don’t submit Form 3520-A on time, or at least within the extended time limit, you could face financial penalties. The IRS could impose penalties of $10,000 per instance of non-compliance, or 5% of the gross value of any trust assets under your control, depending on which is the greatest figure.
You can challenge IRS penalties for a late Form 3520-A if you can show that you acted innocently rather than intentionally. In other words, if you can show you acted in good faith, not negligently or willfully, the IRS may reduce or waive late filing penalties. The Gordon Law team can help you approach the IRS regarding penalty waivers should this be necessary.
Can I Ignore Form 3520-A?
No, you should not ignore Form 3520-A, even if it’s just an information return. The IRS could deem a failure to file as wilful non-compliance with tax reporting obligations. They could also see it as an attempt to conceal foreign assets, or to commit tax fraud.
If Form 3520-A slips your mind and you forget to file, don’t panic. You have 90 days from any notification from the IRS regarding non-compliance to fix the issue (otherwise, you may face further penalties). Give our team a call right away and we’ll guide you through the process of negotiating with the IRS and submitting Form 3520-A late.
How Do I Complete Form 3520-A?
Now we’ve covered who should complete Form 3520-A, let’s break down how to approach each part of the form.
Set Out the General Trust Information
First, complete the general information section about the trust. This includes, for example, taxpayer identification numbers (TINs), street address, name and ID numbers for any U.S. agents, and how many foreign grantor and beneficiary statements are included with the form. You should also confirm what––if any––additional documents you’re attaching (especially important if there’s no U.S. agent appointed).
Complete the Income Statement
The income statement is where you list any taxable income the trust received in the financial year. Examples of income to include are:
- Interest income e.g. from bonds, accounts, and mortgages
- Dividends
- Income from partnerships, estates, and S corps
- Capital gains and losses
You should also include expenses such as interest paid, taxes, charitable contributions, and distributions to any U.S. beneficiaries.
Provide Balance Sheet Details
Next, it’s time to list the trust’s assets, or possessions, and its liabilities, meaning what it owes. The assets are set against the liabilities so you can figure out the trust’s overall net worth i.e. what it’s worth in the current tax year.
Examples of assets to include are cash, property, investments, and intellectual property e.g. trademarks. Liabilities include professional fees, loans, debts, and outstanding bills from a decedent’s estate.
Complete Grantor and Beneficiary Details
Every individual U.S. owner gets their own statement confirming their ownership stake, and their share of any deductions and expenses. Similarly, each U.S. beneficiary gets a statement confirming their interest and any distributions they have received. So, these statements should be completed next.
Sign the Form
Finally, you sign and complete the declaration that you’ve completed the form honestly and fully, to the best of your knowledge, and that it’s an accurate return. Once you’ve completed the final declaration, you can go ahead and file your return as per the IRS instructions.
Can I Correct Form 3520-A Errors?
Yes. Thankfully, the IRS will let you submit a further Form 3520-A as long as you clearly mark it as a second return by checking the “Amended Return” box at the top of the form.
Although the IRS accepts that mistakes happen, they don’t always look upon them kindly. If they think that you acted carelessly––or even deliberately––when you submitted the incorrect return, they could impose penalties or take a closer look at your own IRS returns. So, although you can fix Form 3520-A mistakes by submitting a new form, it’s best to check your return thoroughly before sending to limit the risk of IRS scrutiny.
How Do I File Form 3520-A?
Unfortunately, you can’t email Form 3520-A or submit it electronically. It must be sent by physical post––so give yourself plenty of time to meet the filing deadline. Completed Form 3520-As, and supporting documents, should be mailed to:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Are you sending a substitute Form 3520-A alongside your own Form 3520? The mailing address is the same, so you can go ahead and file them together.
Do I Need an Attorney to Help Me File Form 3520-A?
No. But as with any IRS information return, especially one as complex as a Form 3520-A, there are many reasons why it’s a good idea to seek legal help from tax professionals before filing.
- The IRS won’t hesitate to impose financial penalties, or even audit a tax return, over a late or incomplete Form 3520-A. Having a tax lawyer on your side not only reduces the chances of filing incorrectly in the first place, but ensures you have counsel you can rely on for support and guidance when appealing IRS action.
- Tax forms such as Form 3520-A are complicated and time-consuming to complete. The Gordon Law tax team can give you the knowledge you need to complete and file your return as quickly––and with as little stress––as possible.
- Tax laws, especially those involving foreign interests, are constantly in flux. At Gordon Law, we’re here to ensure you have access to the most up-to-date information and we’ll help you understand how any changes could affect your return.
When it comes to the IRS, there’s never any guarantee they won’t propose tax adjustments or audit your return. But with the Gordon Law team on hand to help, you can face any tax debt problem with confidence.
Need Help Completing Form 3520-A? Call Gordon Law Today!
There’s no doubt that Form 3520-A is complicated, but you don’t have to handle foreign tax returns alone. Instead, turn to Gordon Law for the support and guidance you need. Whether you’re feeling overwhelmed by tax planning or you’re facing IRS penalties for missing a filing deadline, it doesn’t matter how complex your tax issue is. We have the experience and commitment to help you through this tax season––and any related legal issue––and beyond. Call us, email us, or schedule a meeting online to discuss how we might help.
