How to File a Foreign Trust Report (IRS Form 3520)

Introduction

U.S. taxpayers who have financial interests in a foreign trust or receive large gifts from foreign individuals must file IRS Form 3520 to report these transactions. This form is used to ensure compliance with U.S. tax laws regarding foreign trusts, inheritances, and certain foreign transactions. Failure to file Form 3520 or incorrect reporting can result in substantial penalties, making it crucial for taxpayers to understand their obligations.

This article provides a step-by-step guide on how to file IRS Form 3520, including who needs to file, what information is required, and key deadlines.

1. Who Must File IRS Form 3520?

Taxpayers must file Form 3520 if they meet any of the following conditions:

• They are the grantor (creator), owner, or beneficiary of a foreign trust.
• They receive distributions from a foreign trust.
• They transfer money or property to a foreign trust.
• They receive gifts or inheritances from a foreign person exceeding:
  • $100,000 from a foreign individual or estate.
  • $18,567 (for 2025) from a foreign corporation or partnership.

2. When is Form 3520 Due?

• Due Date: The form is due on April 15 of the following tax year, with an automatic extension to October 15 if the taxpayer files a tax extension.
• Penalty for Late Filing: Failure to file can result in penalties of up to 35% of the trust distribution amount or 5% of unreported foreign gifts per month (capped at 25%).

3. Step-by-Step Guide to Filing Form 3520

Step 1: Complete the Basic Information (Part I)

• Provide name, address, Social Security Number (SSN) or Taxpayer Identification Number (TIN).
• Indicate the type of transaction (foreign trust, gift, or inheritance).

Step 2: Report Transfers to a Foreign Trust (Part II)

• If you transferred assets to a foreign trust, report:
  • The amount and type of transfer (cash, property, securities).
  • Any U.S. tax deferrals claimed.
  • Trust details, including name, address, and country.

Step 3: Report Distributions from a Foreign Trust (Part III)

• If you received a distribution from a foreign trust, report:
  • The amount and type of distribution.
  • Whether the trust provided a Foreign Non-Grantor Trust Beneficiary Statement (simplifies tax treatment).
  • The fair market value of assets received.

Step 4: Report Foreign Gifts or Bequests (Part IV)

• If you received a foreign gift or inheritance, provide:
  • The total amount received.
  • The source (individual, estate, or foreign corporation/partnership).
  • Whether the funds were received in cash or property.

4. How to Submit Form 3520

• Mail the completed Form 3520 to:
  • Internal Revenue Service Center
    P.O. Box 409101
    Ogden, UT 84409
• Electronic filing is not available, so the form must be mailed.

5. Common Mistakes to Avoid

• Failing to report foreign gifts or trust distributions.
• Incorrectly calculating foreign trust income or transfers.
• Not filing Form 3520-A if required (owners of foreign trusts must also file Form 3520-A).
• Missing deadlines, which can result in heavy penalties.

Conclusion

IRS Form 3520 is essential for reporting foreign trust transactions and large foreign gifts to avoid IRS penalties. Taxpayers with foreign financial interests should ensure accurate reporting and timely filing to remain compliant.

Tax Partners can assist in preparing Form 3520 and navigating complex foreign trust reporting requirements to prevent costly penalties.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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