How to File Form 3520 for Foreign Trusts and Gifts

The Internal Revenue Service (IRS) uses Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, as an informational return. Its purpose is for U.S. persons, including citizens, residents, and certain legal entities, to disclose specific financial interactions with foreign trusts and the receipt of large gifts from foreign sources. This form is not used to calculate a tax liability; rather, it serves as a transparency tool for the IRS to monitor assets and transfers that fall outside of typical domestic financial channels. Filing helps taxpayers avoid significant penalties.

Determining Your Filing Requirement

A U.S. person’s obligation to file Form 3520 is triggered by specific events and monetary thresholds related to foreign gifts and trusts. One of the most common triggers involves the receipt of gifts or bequests from foreign sources. If you receive gifts from a nonresident alien individual or a foreign estate that total more than $100,000 during the tax year, you are required to file. You must aggregate all such gifts received throughout the year to determine if this threshold is met; two separate gifts of $60,000 from different foreign individuals would require a filing.

A lower threshold applies to gifts from foreign entities. A U.S. person must file Form 3520 if they receive gifts totaling more than an annually adjusted amount from a foreign corporation or a foreign partnership. The source of the gift dictates which reporting limit applies.

Beyond gifts, various interactions with a foreign trust will also necessitate filing Form 3520. This includes any instance where a U.S. person creates a foreign trust or transfers money or property to one.

Receiving any distribution, whether direct or indirect, from a foreign trust is another clear filing trigger. Furthermore, a U.S. person who is considered the “owner” of a foreign trust under U.S. tax rules must file annually to report this ownership status. This ownership reporting is required regardless of whether any transactions or distributions occurred during the year.

Information and Documentation to Gather

Before completing Form 3520, gathering the correct information and documentation is a necessary step. You will need complete identifying details for any foreign person or entity involved. This includes the full name and complete address of the foreign individual who gave a gift or the foreign trust involved in a transaction. If the foreign person has a U.S. taxpayer identification number, that should also be collected.

For transactions involving a foreign trust, more extensive documentation is required. You should obtain a copy of the trust instrument and any subsequent amendments. The name and contact information for the trustee(s) are also needed.

Specific details about each reportable transaction are also mandatory. This includes the date of each gift, transfer, or distribution, and a detailed description of the property involved. You must determine the property’s Fair Market Value (FMV) on the date of the transaction.

Determining the FMV is straightforward for cash but requires more effort for other assets. For publicly traded securities, the value is the average of the high and low trading prices on the transaction date. For significant assets like real estate or a stake in a privately held company, a formal appraisal from a qualified professional is often necessary.

Completing Form 3520 Part by Part

With all necessary information gathered, you can complete the form, which is divided into four parts. You will only complete the sections that apply to your specific situation. The initial section of the form requires basic identifying information about the filer before proceeding to the main parts.

• Part I, Transactions With Foreign Trusts: This must be completed by any U.S. person who made a transfer of property to a foreign trust during the year. This includes the creation of a new foreign trust or contributions to an existing one. Here, you will report details about the property transferred, such as its description, fair market value, and your tax basis in the property.
• Part II, U.S. Owner of a Foreign Trust: This is for U.S. persons treated as the owner of all or a portion of a foreign trust under the grantor trust rules found in sections 671 through 679 of the Internal Revenue Code. This part requires reporting identifying information about the trust and confirming your ownership status. Filers may also need to attach a substitute Form 3520-A if the foreign trust fails to file it.
• Part III, U.S. Beneficiary of a Foreign Trust: This is where you report any distributions received from a foreign trust. You must disclose the fair market value of the property received and provide details about the trust. This section also requires the beneficiary to determine the tax treatment of the distribution, which can be complex.
• Part IV, U.S. Person Who Received Certain Foreign Gifts or Bequests: This is where you report gifts or bequests that exceed the reporting thresholds. You must provide the date of the gift, a description of the property, its fair market value, and the name and address of the foreign donor. If the gift came from a foreign corporation or partnership, you must identify that entity.

The Filing Process and Deadlines

The due date for Form 3520 is aligned with the due date for your individual income tax return, Form 1040, which is typically April 15. This includes any extensions you have filed for your personal return.

Filing for an automatic six-month extension for your Form 1040 by submitting Form 4868 will also automatically extend the deadline to file Form 3520 to October 15. No separate extension request is needed for Form 3520.

Form 3520 must be mailed separately from your income tax return. It is not filed as an attachment to your Form 1040. The form must be sent to a specific IRS service center address, which is currently in Ogden, Utah. You should check the most current Form 3520 instructions on the IRS website for the precise mailing address.

After mailing the form, it is advisable to retain proof of filing. Using a service like U.S. Postal Service Certified Mail provides a receipt that proves you mailed the form on a specific date. This documentation can be useful if the IRS later questions the timeliness of your filing.

Penalties for Non-Compliance

Failing to file Form 3520 on time, or filing an incomplete or inaccurate form, can lead to substantial penalties. The penalty amounts vary depending on the nature of the unreported transaction.

For unreported foreign gifts or bequests, the penalty is 5% of the value of the gift for each month that the failure to report continues. This penalty is capped at a maximum of 25% of the total value of the gift.

The penalties related to foreign trust transactions are more stringent. For failing to report a transfer to a foreign trust or a distribution received from one, the penalty can be up to 35% of the gross reportable amount. In cases where a U.S. person fails to report their ownership of a foreign trust, the penalty is the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person.

The IRS may waive or abate these penalties if the taxpayer can demonstrate that the failure to file was due to “reasonable cause” and not willful neglect. To meet this standard, a filer must show they exercised ordinary business care and prudence but were still unable to file the form correctly or on time. This involves presenting a clear, fact-based explanation for the non-compliance.