IRS Form 3520-A Explained
IRS Form 3520-A Explained
It is important that Americans comply with the Internal Revenue Code (IRC) when they are involved with trusts in a foreign country. IRS Tax Form 3520-A is one of the tax documents U.S. citizens may have to file when they submit their tax returns.
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Key Takeaways:
- IRS Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, is an example of a tax document that must be filed every year by taxpayers who are the trustees, beneficiaries, or owners of a foreign trust. IRS Form 3520-A informs the IRS about all of the transactions between the Trust and the U.S. beneficiary, and between the Trust and the U.S. owners.
- IRS Form 3520-A must be filed in the case that a foreign trust has a U.S. owner so that the individual satisfies their annual information reporting requirements with the IRS. Full or partial U.S. owners of the foreign trust are responsible for ensuring that Form 3520-A is filed for the foreign trust and that all the annual statements are completed for the U.S. beneficiaries and U.S. owners.
- The due date for filing IRS Form 3520-A is the 15th day of the third month following the end of the tax year for the trust. If the tax year of the trust follows the regular tax season, IRS Form 3520-A is due on March 15. However, if the taxpayer is filing a substitute Tax Form 3520-A alongside their IRS Form 3520, the due date for these forms will be the date listed on IRS Form 3520, and not necessarily the 15th day of the third month following the end of the tax year for the trust.
- A potential penalty associated with IRS Form 3520-A includes $10,000 or 5% of the gross value of the portion of the assets in the foreign trust that is owned by the U.S. taxpayer, whichever value is greater, as the initial penalty. A separate 5% penalty or $10,000 penalty, whichever value is greater, may be added to the fee if the taxpayer fails to ensure the filing of Form 3520-A for the foreign trust, the provision of annual statements to the U.S. beneficiaries and owners of the foreign trust, or provides incorrect or incomplete information in the tax return.
What Is IRS Form 3520-A?
IRS Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, is an example of a tax document that must be filed every year by taxpayers who are the trustees, beneficiaries, or owners of a foreign trust. IRS Form 3520-A informs the IRS about all of the transactions between the Trust and the U.S. beneficiary, and between the Trust and the U.S. owners. The IRS requires qualifying individuals to file this form to prevent tax evasion and ensure all people involved with foreign accounts are reporting their assets correctly.
The U.S. owner must complete a substitute Form 3520-A for the foreign trust and attach it to the U.S. owner’s IRS Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts if the foreign trust fails to file IRS Form 3520-A. In this case, to avoid facing the foreign trust’s failure-to-file penalty, the due date must coincide with the deadline listed on the U.S. owner’s Tax Form 3520, and not the deadline outlined on IRS Form 3520-A.
What Is A Foreign Trust?
A foreign trust is a legal entity established outside of the United States that is used to hold assets and distribute income to beneficiaries. The key feature of a foreign trust is that it is established and governed by the laws of a country other than the United States.
In general, if a foreign trust has U.S. beneficiaries or if U.S. taxpayers are involved in its establishment or operation, it may be subject to U.S. tax laws and reporting requirements, such as in the case where taxpayers must file IRS Form 3520-A.
Who Must File IRS Form 3520A?
IRS Form 3520-A must be filed in the case that a foreign trust has a U.S. owner so that the individual satisfies their annual information reporting requirements with the IRS.
Whether the person is a full owner or only has partial ownership of a foreign trust, according to sections 671 through 679 of the grantor trust rules, these U.S. owners are responsible for ensuring that Form 3520-A is filed for the foreign trust and all the annual statements are completed for the U.S. beneficiaries and U.S. owners.
Who Must Sign IRS Form 3520 A?
The trustee of the foreign trust is usually the individual who must sign IRS Form 3520-A. However, the person who must sign IRS Form 3520-A is dependent on who files the tax return.
- If an individual or fiduciary files the tax return, that same individual or fiduciary is responsible for signing and dating IRS Form 3520-A.
- If a partnership files the tax return, a general partner or member of the limited liability company (LLC) must sign and date IRS Form 3520-A.
- If a corporation or business files the tax return, either the president, vice president, chief accounting officer, treasurer, assistant treasurer, or another authorized corporate officer must sign and date IRS Form 3520-A.
It should be noted that if a U.S. owner is completing a substitute IRS Form 3520-A for their tax return and attaching it to the U.S. owner’s Tax Form 3250, the U.S. owner must provide a dated signature as well as the appropriate taxpayer identification number (TIN) on the line that reads “title” in the signature box.
In the event that a paid preparer is completing and submitting IRS Form 3520-A on behalf of the taxpayer, they must:
- Complete the required preparer information
- Sign the tax return in the appropriate section designated for the signature of the preparer
- Provide the filer with a copy of the tax return.
When Is IRS Form 3520-A Due?
The due date for filing IRS Form 3520-A is the 15th day of the third month following the end of the tax year for the trust. If the tax year of the trust follows the regular tax season, IRS Form 3520-A is due on March 15.
However, if the taxpayer is filing a substitute Tax Form 3520-A alongside their IRS Form 3520, the due date for these forms will be the date listed on IRS Form 3520, and not necessarily the 15th day of the third month following the end of the tax year for the trust.
Failure-To-File Penalties For IRS Form 3520-A
In order to prevent U.S. taxpayers from committing illegal tax evasion by failing to claim foreign assets on their tax returns, the IRS attaches a variety of fees and penalties to the accounts of taxpayers who do not comply with the filing requirements of tax forms.
Some of the potential penalties associated with IRS Form 3520-A include:
- $10,000 or 5% of the gross value of the portion of the assets in the foreign trust that is owned by the U.S. taxpayer, whichever value is greater, as the initial penalty.
- A separate 5% penalty or $10,000 penalty, whichever value is greater, is added to the fee if the taxpayer fails to ensure the filing of Form 3520-A for the foreign trust, the provision of annual statements to the U.S. beneficiaries and owners of the foreign trust, or provides incorrect or incomplete information in the tax return.
Additional penalties can also be issued by the IRS if the taxpayer is non-compliant with their IRS notice.
What Information Is Required On Tax Form 3520-A?
IRS Form 3520-A is required to be filed annually for foreign trusts with a U.S. beneficiary during the settlor’s or insured taxpayer’s lifetime, or within one year before the death of the settlor and their spouse. This tax form allows the IRS to gain information about the full, complete accounting of the trust operations and activities and the name of the U.S. agent who is responsible for the trust. The IRS may require additional information at this time to gain a more complete report on the trust.
Within this four-page tax form, the filer must disclose all information about the income and expenses of the trust, including filling out a balance sheet reporting about the beginning and end of the tax year. This includes different types of taxes that were paid by the trust, such as property taxes, but does not include deductions from federal income taxes, estate taxes, inheritance taxes, legacy taxes, succession taxes, gift taxes, federal duties taxes, or excise taxes. The balance sheet and income statement must be based on “fair values,” and not on generally accepted accounting principles (U.S. GAAP), and if an asset is not listed on an auction market, reasonable estimates are acceptable.
The IRS 3520-A tax form also provides areas to provide the information that must be submitted by the grantor and any U.S. trust beneficiary. The sections for this information are titled “Foreign Grantor Trust Owner Statement” and “Foreign Grantor Trust Beneficiary Statement.”
If you have questions about filing IRS Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, it is important to consult with a tax professional to ensure you complete the required process accurately to avoid interests and penalties. Contact us at Ideal Tax today for help with your tax return this tax season. We also offer a free tax consultation regarding any tax liability questions you may have.
