IRS Form 3520-A: American Expat Guide

Written by: Josh Katz, CPA

For Americans living abroad, managing financial affairs can become especially intricate, given the need to comply with tax obligations in their country of residence and the United States. US citizens and residents are taxed on their global income, which includes any interests in foreign trusts. This dual obligation means that Americans abroad must carefully navigate the tax systems of their host countries while also adhering to stringent US tax laws and reporting requirements.

A critical component of this compliance is understanding and correctly filing IRS Form 3520-A. This form is essential for reporting information about foreign trusts to the IRS. While you might be fulfilling your tax responsibilities in your country of residence, failing to comply with US tax filing requirements can result in severe penalties. Therefore, US taxpayers with foreign trusts must be well-versed in the specifics of Form 3520-A to ensure they meet all their obligations.

If you need assistance understanding the tax implications of filing Form 3520-A as an American expat, Universal Tax Professionals is here to help. Our expertise covers a wide range of US expat tax services tailored to the unique needs of American citizens living abroad. Whether you’re dealing with the intricacies of foreign trust reporting or need help with other expat tax obligations, our team is committed to providing you with thorough and reliable support

What is IRS Form 3520-A?

IRS Form 3520-A, officially titled the “Annual Information Return of Foreign Trust with a US Owner,” is used by US taxpayers to report information about a foreign trust in which they have a financial interest. The form ensures the IRS receives comprehensive information about the trust’s activities, income, and owners.

IRS Form 3520-A

Who Needs to File IRS Form 3520-A?

Any foreign trust with at least one US owner must file Form 3520-A. The responsibility falls on the foreign trust’s trustee. However, if the trustee fails to file the form, the trust’s US owner must ensure it is filed.

Key Filing Criteria

To determine whether you need to file IRS Form 3520-A, consider the following criteria:

Foreign Trust Definition

  • The IRS defines a foreign trust as one that is established, operated, or governed under foreign law. This includes any trust not considered a domestic trust under US law.
  • A trust is considered foreign if it fails to meet both the “court test” and the “control test.” The court test requires that a court within the United States can exercise primary supervision over the trust’s administration. The control test requires that one or more US persons have the authority to control all substantial decisions of the trust.

US Owner

  • A US owner is any US person who, directly or indirectly, owns any portion of the trust. This ownership can occur through various means, such as direct ownership, an intermediary, or a nominee.
  • US persons include US citizens, resident aliens, domestic corporations, domestic partnerships, domestic trusts, and domestic estates.

Specific Examples of Foreign Trusts That Could Trigger Form 3520-A

IRS Form 3520-A is required to be filed for various types of foreign trusts that involve U.S. owners. Here are specific examples of foreign trusts that would necessitate the filing of Form 3520-A:

Family Trusts Established Abroad

Example: A US citizen creates a trust in Switzerland to manage and distribute family wealth.

  • Scenario: The trust holds investments in Swiss bank accounts, real estate, and international stocks.
  • Trigger: The trust is a foreign entity with a US owner (the settlor and/or beneficiaries), necessitating the filing of Form 3520-A to report its financial activities to the IRS.

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Foreign Irrevocable Trusts

Example: A foreign national residing in the US transfers assets into an irrevocable trust governed by the laws of Bermuda, naming their US children as beneficiaries.

  • Scenario: The trust generates income from investments and occasionally distributes funds to the US beneficiaries.
  • Trigger: The presence of US beneficiaries who receive distributions from the trust requires the filing of Form 3520-A.

Foreign Grantor Trusts

Example: A US person establishes a grantor trust in Canada, retaining control over the trust assets and income.

  • Scenario: The trust holds Canadian mutual funds and rental properties that generate income.
  • Trigger: The US person’s control and ownership of the trust means they must ensure Form 3520-A is filed to report the trust’s income and expenses.

Foreign Pension Trusts

Example: A US expatriate participates in a pension trust established by their employer in a foreign country, such as Germany.

  • Scenario: The pension trust accumulates retirement funds and investments designated for the expatriate.
  • Trigger: If the pension trust meets the IRS criteria for a foreign trust and the US person has an ownership interest, Form 3520-A must be filed.

Foreign Business Trusts

Example: A US entrepreneur co-founds a business trust in Hong Kong to facilitate international trading operations.

  • Scenario: The trust manages and distributes profits from the trading activities to its owners, including the US entrepreneur.
  • Trigger: The US ownership interest in the foreign business trust necessitates the filing of Form 3520-A.

Offshore Asset Protection Trusts

Example: A US resident sets up an asset protection trust in the Cayman Islands to shield assets from potential creditors.

  • Scenario: The trust owns various assets, including cash, securities, and perhaps even US real estate through foreign entities.
  • Trigger: Despite the protective structure, the US ownership interest mandates the reporting of the trust’s financial details via Form 3520-A.

Foreign Testamentary Trusts

Example: A US citizen inherits a share of a foreign trust established by a non-US relative’s will.

  • Scenario: The testamentary trust, governed by the laws of the United Kingdom, holds substantial financial assets and pays income to the US beneficiary.
  • Trigger: The US beneficiary’s interest in the foreign testamentary trust requires the trust to file Form 3520-A annually.

Foreign Charitable Trusts with US Beneficiaries

Example: A philanthropist in Australia establishes a trust to fund educational scholarships for US students.

  • Scenario: The trust disburses funds to US students and educational institutions.
  • Trigger: The involvement of US beneficiaries triggers the requirement for the trust to file Form 3520-A.

Foreign Life Insurance Trusts

Example: A US individual buys a foreign life insurance policy and places it into a trust governed by the laws of Singapore.

  • Scenario: The trust owns the life insurance policy, and the US individual is both the grantor and beneficiary.
  • Trigger: The trust’s status as a foreign trust with a US owner requires Form 3520-A to be filed.

Foreign Discretionary Trusts

Example: A non-US parent sets up a discretionary trust in Jersey for their US children, giving trustees full discretion over distributions.

  • Scenario: The trust holds a diversified portfolio and occasionally makes discretionary distributions to the US beneficiaries.
  • Trigger: The discretionary nature and the presence of US beneficiaries trigger the need for Form 3520-A to be filed.

These examples illustrate the diverse nature of foreign trusts that could trigger the need to file IRS Form 3520-A. US taxpayers with interests in any such foreign trusts must ensure compliance with US tax laws by accurately reporting the trust’s financial activities, thereby avoiding significant penalties and maintaining transparency with the IRS.

Filing Requirements and Deadlines for IRS Form 3520-A

Annual Filing Deadline

The form must be filed annually by the 15th day of the third month after the end of the trust’s tax year. For trusts that follow the calendar year, this typically means the filing deadline is March 15th of the following year.

Distribution of Statements

In addition to filing the form with the IRS, the foreign trust must provide each US owner and US beneficiary with a copy of their respective statement, known as Schedule K-1 (Form 3520-A), by the same deadline. This ensures that US owners have the necessary information to report their share of the trust’s income, deductions, credits, and other financial details on their individual tax returns.

Filing Extensions

If the foreign trust or the US owner is unable to file Form 3520-A by the initial deadline, an extension can be requested. To request an extension for filing Form 3520-A, the foreign trust can file Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.”

Filing Form 7004 provides an automatic six-month extension, moving the deadline to the 15th day of the ninth month after the end of the trust’s tax year.

Important Considerations for Filing Extensions

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  • Timely Request: It is crucial to file Form 7004 on or before the original due date of Form 3520-A to obtain the extension.
  • Separate Extensions: Filing an extension for Form 3520-A does not automatically extend the deadline for other related forms, such as Form 3520. Separate extension requests must be filed for each form if needed.

Consequences of Missing the Filing Deadline

Failure to file Form 3520-A or to request an extension in a timely manner can result in significant penalties:

  • Initial Penalty: The IRS imposes an initial penalty of $10,000 for failure to file Form 3520-A by the due date, including extensions.
  • Additional Penalties: If the failure to file continues, additional penalties may be assessed based on a percentage of the trust’s assets or income. These penalties can escalate rapidly, particularly for trusts with substantial assets.
  • Further Penalties: Additional penalties may also apply for providing incomplete or inaccurate information, or for failing to furnish the required statements (Schedule K-1) to US owners and beneficiaries.

What is Form 3520-A Substitute?

The Form 3520-A substitute is an alternative to the standard Form 3520-A that can be filed by a US person when a foreign trust fails to submit its own Form 3520-A. The US owner files this substitute form and attaches it to their Form 3520, checking the “Substitute Form 3520-A” box, and then signing and dating the form.

The deadline for filing the Form 3520-A substitute coincides with the due date for the US person’s income tax return, typically April 15th, or the extended due date if an extension has been requested. Filing the substitute Form 3520-A ensures the US person meets the reporting requirements for the foreign trust and avoids penalties due to the trust’s failure to file.

What is IRS Revenue Procedure 2020-17?

IRS Revenue Procedure 2020-17 provides guidance on the reporting requirements for certain tax-favored foreign trusts and the exceptions for reporting on Form 3520. Specifically, it addresses the reporting obligations for US persons who are beneficiaries of certain tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts.

Purpose of Rev. Proc. 2020-17

The Revenue Procedure aims to reduce the reporting burden on US persons who are beneficiaries of certain foreign trusts that are tax-favored in their respective countries.

Exceptions to Reporting

The Revenue Procedure exempts US persons from reporting on Form 3520 and Form 3520-A for certain tax-favored foreign trusts. These trusts include:

  • Tax-Favored Foreign Retirement Trusts: These are trusts that operate exclusively or almost exclusively to provide pension or retirement benefits.
  • Tax-Favored Foreign Non-Retirement Savings Trusts: These are trusts that operate exclusively or almost exclusively to provide medical, disability, or educational benefits.

Criteria for Exemption

  • To qualify for the exemption, the foreign trust must meet specific criteria, including:
  • The trust must be generally exempt from income tax or receive favorable tax treatment in the foreign country.
  • Annual contributions to the trust must be limited to a certain amount.
  • The trust must operate exclusively or almost exclusively to provide pension, retirement, medical, disability, or educational benefits.
  • Contributions to the trust must be limited by reference to earned income.
  • The trust must be subject to government regulation and provide annual information reporting.

By providing these exceptions, the IRS aims to alleviate the compliance burden on US persons who are beneficiaries of these foreign trusts, recognizing that these trusts are already subject to regulatory oversight in their home countries.

Hence, US persons who are beneficiaries of qualifying foreign retirement or non-retirement savings trusts do not need to file Form 3520 or Form 3520-A for these trusts.

This reduces the administrative burden and potential penalties associated with failing to file these forms.

Difference Between Form 3520-A and Form 3520

Understanding the distinction between IRS Form 3520-A and Form 3520 is crucial for US persons involved with foreign trusts. While both forms are related to foreign trusts and have some overlapping requirements, they serve different purposes and have distinct filing requirements.

3520-A 3520
Purpose Form 3520-A, "Annual Information Return of Foreign Trust With a U.S. Owner," is designed to provide detailed information about the activities of the foreign trust, its financial status, and the U.S. persons who are owners of the trust. Form 3520, "Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts," is used by U.S. persons to report certain transactions with foreign trusts, ownership of foreign trusts, and the receipt of large gifts or bequests from foreign persons.
Scope This form is filed by the foreign trust’s trustee and includes comprehensive financial statements, income statements, balance sheets, and a detailed accounting of trust activities. It also includes Schedule K-1, which reports the distributive share of income, deductions, credits, etc., to U.S. owners and beneficiaries. This form is filed by U.S. persons who engage in reportable transactions with foreign trusts, including transfers to the trust, receipt of distributions, or who have received significant gifts or bequests from foreign individuals or entities.
Who Files The primary responsibility to file Form 3520-A lies with the foreign trust’s trustee. If the trustee fails to file, the U.S. owner of the trust must ensure that a substitute Form 3520-A is filed. U.S. persons involved with foreign trusts must file Form 3520. This includes U.S. persons who create or transfer money or property to a foreign trust, receive distributions from a foreign trust, or receive gifts or bequests from foreign persons exceeding certain thresholds.
Deadline The form must be filed by the 15th day of the third month after the end of the trust’s tax year (typically March 15 for calendar year-end trusts). An extension can be requested using Form 7004, which extends the deadline to September 15. The form must be filed by the same due date as the U.S. person’s income tax return, typically April 15, or the extended due date if an extension has been filed.
Content Includes information on the U.S. person’s transactions with the foreign trust, details of received distributions, and information on significant gifts or bequests from foreign persons. If the foreign trust fails to file Form 3520-A, attaching the substitute Form 3520-A may be required. Includes information on the U.S. person’s transactions with the foreign trust, details of received distributions, and information on significant gifts or bequests from foreign persons. If the foreign trust fails to file Form 3520-A, attaching the substitute Form 3520-A may be required.

IRS Form 3520-A is a critical requirement for US taxpayers interested in foreign trusts. Understanding who must file, the specific requirements, and the differences between Form 3520 and Form 3520-A can help ensure proper adherence to US tax laws, thereby avoiding costly penalties.

However, navigating the complexities of foreign trust reporting can be challenging, especially for those unfamiliar with tax regulations and requirements. Therefore, seeking guidance from a qualified tax professional with expertise in international tax compliance is highly recommended. A tax professional can provide invaluable assistance in accurately completing the forms, ensuring compliance with IRS regulations, and minimizing the risk of errors or omissions.