Comprehensive Guide to Forms 3520 and 3520-A

Comprehensive Guide to Forms 3520 and 3520-A

If you are a U.S. person with ties to foreign trusts or who has received significant gifts from foreign sources, understanding your obligations under IRS Forms 3520 and 3520-A is essential. Watter CPA, based in Rockville, Maryland, provides expert guidance on these intricate reporting requirements.

What are Forms 3520 and 3520-A?

Form 3520 is the "Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts." Form 3520-A is the "Annual Information Return of Foreign Trust with a U.S. Owner." Both forms are designed to help the IRS track foreign assets, gifts, and trust income that may be subject to U.S. taxes. The 2024 filing requirements remain consistent with previous years, but it's crucial to stay updated on any changes issued by the IRS.

Key Situations Requiring Form 3520 Filing

For 2024, U.S. persons are required to file Form 3520 with the IRS under the following situations:

• Receipt of Substantial Foreign Gifts or Bequests: If you receive a gift or inheritance from a foreign individual or estate exceeding $100,000 within a calendar year, filing is mandatory.
• Payments from Foreign Corporations or Partnerships: Receiving more than $18,567 in 2024 from foreign corporations or partnerships necessitates filing Form 3520.
  
• Distributions from a Foreign Trust: Any distribution, regardless of the amount, received from a foreign trust requires filing.
• Ownership of Foreign Trust Assets: If you are an owner of any portion of the assets in a foreign trust, you must comply with filing requirements.

U.S. Person for Tax Purposes

The definition of a “U.S. person” includes more than just U.S. citizens and green card holders:

• Foreign nationals who have resided in the U.S. for 183 days or more during a calendar year, without an applicable exemption, are also considered U.S. persons.

Filing Deadlines and Submission Process

The deadline for filing both Form 3520 and Form 3520-A in 2024 is the same as the deadline for your income tax return, including extensions. These forms must be filed separately from your federal income tax return:

• Form 3520: This form is generally due on the same date as your federal income tax return (Form 1040), which is April 15th each year. If you file for an extension on your tax return, the deadline for Form 3520 is automatically extended to October 15th.
• Form 3520-A: This form must be filed by the 15th day of the third month after the end of the trust’s tax year, which is typically March 15th for calendar-year trusts. If the trust files for an extension, the deadline is extended to September 15th.

Timely filing is essential to avoid any penalties.

Penalties for Non-Compliance

For 2024, the penalties for non-compliance remained strict:

• Monetary Penalties: The IRS imposes a penalty of 5% of the total amount of the foreign gift or bequest per month for not filing Form 3520, up to a maximum of 25%. For Form 3520-A, penalties start at $10,000 or 5% of the trust’s gross value, whichever is greater, and can increase based on the severity and duration of non-compliance.
• Notice of Penalty: If the IRS identifies a failure to file, you will receive a CP15 Notice. These penalties are civil fines and may be waived only if you can demonstrate reasonable cause.

Options for Contesting or Abating Penalties

If you receive a penalty notice, you may contest or request an abatement by demonstrating reasonable cause. This may include unforeseen events or circumstances that prevented timely filing. The team at Watter CPA can help you understand your rights and navigate the process to potentially reduce or eliminate these penalties.

Contact Us

At Watter CPA in Rockville, Maryland, our team is well-equipped to assist you in understanding and meeting these filing requirements. Whether you need help filing the necessary forms, disputing penalties, or determining your obligations, we are here to support you. Contact us today for tailored advice on foreign trust and gift reporting.