The Form 3520-A Annual Foreign Trust Reporting Requirements

What are the Form 3520-A Filing Requirements?

When it comes to international tax and reporting, foreign trust tax and reporting are two of the most complicated aspects of annual foreign investment compliance. This is because of many different reasons, such as:

• • • What is a foreign trust?

    • When is a foreign trust taxable?

    • When is a foreign trust reportable?

    • Does the foreign trust qualify for any exceptions (Revenue Procedure 2020-17)?

    • Is there a trustee reporting the trust on Form 3520/3520-A?

    • Were there any distributions?

    • Are there late forms that need to be filed?

In general, the United States Government is not a big fan of foreign trusts since the IRS believes that foreign trust abusive tax schemes are running rampant – and further increase the U.S. Tax Gap. Some examples of potentially improper foreign trusts include the 643(b) trusts (which seek to redefine the concept of Distributable Net Income) as well as the Malta Pension Plan Trust. Let’s go through the basics of how foreign trust and tax reporting works for US persons.

Original Publication Date, 12/2022.

What Is Considered to Be A Foreign Trust?

Trying to define a foreign trust for tax purposes is like watching a dog chase its own tail. That is because the Internal Revenue Code does not actually define what a foreign trust is, rather it defines what a domestic trust is not. In other words, a foreign trust is defined as a trust that does not qualify as a domestic trust. To qualify as a domestic trust, the trust must meet both the control and the court tests. If the trust does not meet both the control and the court tests then it does not qualify as a domestic trust and is instead deemed to be a foreign trust. Oftentimes, this will include trusts that have foreign trustees and/or foreign pension plans.

U.S. Trust with Foreign Assets

Another important aspect to consider is that a domestic trust can have foreign trust aspects to it. For example, if a domestic trust has certain foreign assets in it, then even if it can meet the control and court test, there may be additional foreign reporting and income tax and reporting implications as well, such as DNI/UNI and the Throwback Rule.

When is a Foreign Trust Taxable?

Whether or not the income in a foreign trust is taxable is based on the type of trust and timing. For example, if the trust is a foreign trust and it is a non-grantor trust owned by a foreign person with foreign assets, then generally the United States does not have any control over the foreign trust unless there are U.S. assets in it or unless the U.S. beneficiary has certain ownership over the foreign trust or engaged in certain transactions with the foreign trust. And when the foreign trust is a non-grantor trust with a foreign owner and foreign assets, U.S. taxes will generally kick in when there are distributions made to U.S. beneficiaries — and those distributions are taxable to the U.S. beneficiaries on their U.S. tax return.

However, if the foreign non-grantor trust is owned by a US person, then the US person is generally taxed on the amount of income attributable to them in the foreign trust unless an exception, exclusion, or limitation applies such as pension plans with treaty countries such as the UK. If the foreign trust is a foreign grantor trust and the grantor is a US person, then generally all the income generated from the trust is taxable and the mere fact that the trust is foreign does not shield income in a grant or trust.

Foreign Grantor and Non-Grantor Trust Beneficiary Statement

One method that a U.S. person beneficiary can use to possibly reduce taxes and interest on the distributions they receive from a foreign trust is by receiving a trust beneficiary statement. Since foreign trusts are not required to issue K-1s to the beneficiary similar to how a US trust issues a K-1 to the beneficiary, the grantor and non-grantor trust beneficiary statements are very important in order to try to minimize certain tax/interest implications to the beneficiary in the United States.

When is a Foreign Trust Reportable?

There are two main forms that are used by taxpayers to report foreign trust information. The main form is the Form 3520-A — which is used when a US person is an owner of a foreign trust. The other form is Form 3520, which is used when a person has ownership of a foreign trust, engages in certain transactions with the foreign trust, or receives a distribution from the foreign trust. There are many potential issues that occur with foreign trust reporting such as:

• • • Foreign trust reporting can be very onerous depending on the type of trust that the taxpayer has,

    • The U.S. Person may simply not be able to obtain the information necessary to accurately report the trust, and

    • The failure to timely report the trust information on Form 3520 and/or Form 3520-A could lead to significant fines and penalties.

Does the Foreign Trust Qualify For Any Exceptions (Rev. Proc. 2020-17)

Unfortunately, foreign pension/retirement plans also get stuck in the foreign trust reporting matrix. That is because, from a technical standpoint, a foreign pension plan would be considered a foreign trust — as it has all the necessary cast of characters that would then require a Form 3520 to be filed. However, the purpose of Form 3520 and 3520-A was not to require onerous reporting of foreign pension plans. This could be seen more than ten years ago when the IRS first issued Revenue Procedure 2014-55 which excluded Canadian RRSPs from having to report on Forms 3520 and 3520-A — although the FBAR and Form 8938 are still required for the RRSP.

With the globalization of the U.S. economy, it is not as if the Internal Revenue Service has the time or resources to issue revenue procedures for each and every foreign pension plan. So instead, the IRS issued Revenue Procedure 2020-17 which attempts to provide a roadmap on how certain retirement and non-retirement deferred trusts may avoid form 3520 and 3520-A reporting, noting that similar to Revenue Procedure 2014-55, the FBAR and form 8938 are still required.

Due Dates for Reporting: Is there a Trustee reporting the Foreign Trust

Form 3520-A is typically due March 15th whereas Form 3520 is due in April. When a taxpayer requests an extension of their US tax return, Form 1040 — the Form 3520 goes on extension as well. However, in order to file an extension for Form 3520-A, the taxpayer must file Form 7004 instead. Even though Form 3520-A is typically due in March, in a situation in which the foreign trustee did not file Form 3520-A timely, a substitute form may be filed and coincides with the filing of Form 3520.

Are Late Form 3520/3520-A Forms Required to be Filed?

If a taxpayer has been non-compliant with filing Form 3520 or Form 3520-A, they will want to get into compliance sooner rather than later. Depending on whether or not the taxpayer has additional noncompliance, such as missed foreign income, the FBAR and/or Form 8938 will dictate whether they qualify for the streamlined procedures or whether they would qualify instead for the delinquency procedures — or reasonable cause as an alternative to non-willful late filings. It is important to note, that the delinquency procedure was modified in November of 2020 and no longer provides an automatic guarantee of a penalty waiver.

Proposed Foreign Trust Regulations

Recently, in 2024, the U.S. Government released proposed regulations for foreign trusts — which may impact who has to report, when reporting is required, and when taxpayers (or the trusts themselves) may be exempt from reporting. We have a separate article summarizing the proposed foreign trust regulations.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.