Tax Form 3520-A Annual Return of Foreign Trust with U.S. Owner
Are you a U.S. citizen or resident who owns a foreign trust? If so, then Tax Form 3520-A might be on your radar this tax season. This annual return is required to disclose all the necessary information about foreign trusts with U.S. owners, including financial transactions and investments made within the trust. But don’t worry – we’re here to guide you through the ins and outs of Tax Form 3520-A and ensure that you stay compliant with IRS regulations while maximizing your tax benefits as a foreign trust owner!
Once any individual from the US has any ownership over foreign accounts, they need to take care of various International information reporting forms. Here, in this case, one of them is Tax Form 3520-A, for the US owner of the foreign trust. Essentially, the Tax Form 3520-A is also known as the Annual Information return of Foreign Trust with a US owner under section 6048 (b). This form is one of the most complicated reporting vehicles for overseas assets. This is because Form 3520-A is a tax return form for the trust much like the IRS Tax form 1041 and hence, comprises various moving parts associated with the annual foreign trust reporting requirements. This is much different than the FBAR or Form 8938 or the FATCA which is concerned with the simple reporting of the high-balance and associated income.
The Foreign Trust
Foremost, it is necessary to determine if the individual has a foreign trust or not, as this is essential for foreign trust reporting. However, we are aware of the fact that this is much harder than it appears. For instance, there are countries where an individual might utilize a structure like the Sociedad Anonima for asset protection. While this has been created for trust-like purposes, however, from the US tax perspective it can be categorized as a corporation and not just a trust. This is why it might require reporting on Tax form 5471. Similarly, the Stiftung is not categorized as a foreign trust as such but can be considered as one for US tax and reporting purposes.
Read More-: Tax Form 1065 U.S. Return of Partnership Income
The Tax Form 3520-A: The Detailed Information
Now, let us take a look at what’s inside Tax Form 3520-A:
- The General Information: Part 1
The first part of the form comprises reporting the general information about the name and the location of the trust, and the day the trust was formed. This is the norm with most International information reporting forms. A piece of additional information is also required about whether the US agent was appointed or not. Generally, appointing a US agent is quite beneficial to the foreign trust as it helps minimize the amount of documentation and reporting that needs to be provided to the IRS.
- Foreign Trust Income Statement: Part 2
The next part of the form comprises the foreign trust income statement. It is here, that the taxpayers will need to work hard and get deeper to try their best to provide information regarding the income that is generated in the foreign trust. As one can observe from the form, the usual case of income characters is included like: Interest, gains, rents, dividends, and other such income. Additionally, the taxpayer should also offer information regarding expenses and other distributions from the trust.
- Foreign Trust Balance Sheet: Part 3
The third portion of Form 3520-A is the balance sheet. Here one needs to display that the assets equal liabilities plus equity. Once again, the thoroughness of the taxpayer is determined by understanding the amount of information which is made available. However, one has to bear in mind the idea of diligence. However, one needs to understand that completing Form 3520-A or any other international reporting form is not an exam and you will not be graded like so. One has to keep in mind to do a diligent and reasonable search which is enough to acquire the information so that one can easily prepare the form as accurately as possible. This way you will be ready with the kind of explanation required as and when the IRS visits you, about how you have tried to obtain the information the best that you could.
The Additional Forms
Additionally, one has to also fill in the ancillary forms along with the main form 3520-A, that the taxpayers have to file depending upon their relationship with the trust and the type of trust and other similar issues. Here are some examples of these forms:
- The Foreign Grantor Trust Owner Statement
It is important to complete the additional form that needs to be submitted along with the main form 3520-A when the taxpayer is the granter of a foreign trust. This is known as the Foreign Grantor Trust Owner statement. Here, every US person owner of the trust needs to prepare their statement unless a statement has already been prepared for them. Here, they need to recognise the information regarding the trust, if an agent has been appointed, the part of the trust that is considered to be owned by a certain US individual and the amount of cash or any other fair market value property that was distributed to the owner.
- Foreign Grantor Trust Beneficiary Statement
Here a separate statement for each specific US beneficiary needs to be prepared by the trustee or the owner. This applies to those that have received a distribution for the trust. This is much similar to the foreign grantor trust owner statement apart from the fact that it does not require a detailed income breakdown as it does for the Owner.
The Exceptions: When Filing the Form 3520-A
There are certain cases and instances when taxpayers can easily sidestep or circumvent the reporting requirements on Form 3520-A. Here the two main exceptions include the Revenue Procedures 2020-17 and the Revenue procedure 2014-55.
What is a Revenue Procedure 2020-17
This refers specifically to the pension and the different tax-deferred retirement and non-retirement savings. The IRS is not interested in seeking out taxpayers who have an ownership interest in foreign pension plans or any other deferred investments that might technically be qualified as a trust. These might be used to report the assets on Form 3520-A. This is all the more relevant since these types of accounts are already reported on the FATCA Tax Form 8938 and the FBAR, where the IRS is on the lookout to minimize the heavy burden of duplicative reporting if possible.
The Revenue Procedure- 2014-55
This deals especially with the RRSPs and the RRIFs from Canada. It especially works to exempt the two types of retirement savings from having to be reported on Form 3520 or 3520-A categorized as a foreign trust.
The Non-Compliance: The Current Year Vs the Previous Year
If and when the taxpayer misses out on tax and reporting requirements as in FBAR and FATCA for the previous years, they will need to be careful before submitting their information for the current year to the IRS. This is generally because there is a risk of quite a disclosure if they just start filing forward in the current year and/or mass filing of the previous year’s forms without doing the same under one of the approved IRS offshore submissions processes. Before filing the untimely foreign reporting forms, taxpayers need to consider talking to Board-certified Tax Law Specialists. These are specialized specifically for such kinds of offshore disclosure matters.
To Avoid False Offshore Disclosure Submissions: Willful Vs Non-Willful
Recently, there has been an increased level of scrutiny by the IRS regarding certain streamlined procedure submissions. However, when the individual is not willful they have a good chance of creating a successful submission to streamline the procedure. In case they are willful, it is required by the individuals to submit the IRS voluntary disclosure program instead of the streamlined procedure. However, if the willful taxpayer makes an intentional submission of a false narrative under the streamlined procedure then they might be subjected to significant fines and penalties
The Penalties: on failing to File
One can face a penalty for failing to file form 3520-A on or before the due date. However, it is worth noticing that the IRS has grown more aggressive in seeking out and penalizing American individuals who fail to report foreign financial information. This is not exactly great news, as you need to file the form on time. Some forms have strict penalties when the individual fails to file on time. In case the individual fails to file more than one form then the fines tend to add up. However, these depend upon the case-by-case basis, where the penalties include:
An Initial Penalty which is either equal to or greater than $10000 or 5% of the gross value of the part of the foreign trust’s assets treated as owned by the US.
Additionally, a separate 5% penalty of $10000 or more in case the individual fails to ensure that the foreign trust files the form 3520-A and offers annual statements to the US owners and the beneficiaries. The same applies if the person cannot or does not provide all the required details or incorrect information.
US Trust Vs Foreign Trust
To report the trust on your US tax return, one needs to know the difference between the US trust and the Foreign trust. The main difference between the two lies in the reporting:
- US Trust: One needs to use Form 1041 and check the ‘Grantor’ trust box located in the upper left corner.
- The Foreign Trust: One requires to use the form 1040 NR and check the estate or trust box located on the upper right side of the form. In case the grantor is an individual, she or he needs to check the box on Schedule B, Part III, line 8, of form 1040 every year to report the foreign trust.
Also Read-: Tax Form 2555 for Foreign Earned Income Exclusion
The retirement plans are also considered to be trusts according to the IRS. Many foreign retirement plans are considered to be non-qualified and can also be categorized as foreign trusts that need to be reported on form 3520-A. You can get to know more about this from our team of experts, feel free to reach out to us and we will assist you accordingly.
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💠Frequently Asked Questions💠
Is Form 3520 different from Form 3520-A?
yes, the difference lies in the fact about the individual who files the form
Who needs to file Form 3520-A?
It is the trustee who needs to file the form 3520-A, except in cases when a foreign trust is used exclusively for specific retirement funds/pensions, the purpose of education, or medical purpose. Here, the form needs to be filed by the Foreign Trust or the FT, however, the owner is responsible to ensure its timely filing and also its accuracy
When and Where to file Form 3520-A?
Generally Form 3520-A needs to be filed on the 15th day of the 3rd month after the end of the trust’s tax year. As for the Calendar year, the trust is due on March 15th. However, one can also file for an extension by filing form 7004
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