As we near the end of tax season, it is beneficial to take a quick internal audit of your assets and forms filled to ensure you’ve completed your filings for the year with no discrepancies. Those who receive large gifts from foreign persons, hold large sums of money or inheritances in foreign accounts, or who have foreign assets totaling above a certain sum are required to file Form 3520 each year during tax season. This form is especially important to file thoroughly and correctly, as the miscalculation or discrepancies made on this form cause you to have a higher chance of being audited. The team at Evolution Tax and Legal is breaking down Form 3520: who needs to file it, how to file it, and what could happen if it is left unfiled.
What is Form 3520?
Form 3520 is an informational tax form used to report certain foreign assets, inheritances, or certain large gifts from foreign persons. The nature of the foreign asset will determine whether or not the owner of the foreign trust or recipient of gifts or inheritances will need to file Form 3520.
Who Files Form 3520?
There are three different requirements for who needs to file Form 3520. Typically, if you are the owner of a foreign trust, or the grantor of a foreign trust, you will need to file Form 3520. If you make certain transactions with a foreign trust, you will need to file the form, or if you receive a large gift or inheritance from certain foreign persons, you will need to report said gifts by filing Form 3520.
Form 3520 for U.S. Owners of a Foreign Trust
If you own any part of a foreign trust, you will need to file Form 3520.
Form 3520 for U.S. Taxpayer Transactions With a Foreign Trust
Certain transactions conducted with a foreign trust are required to be reported using this form. These transactions include: transferring any assets to a foreign account. These assets could be property or money. If you receive direct or indirect distributions from a foreign trust. If you have an obligation as the responsible party to report an event during the current year.
The reasoning above is not an exhaustive explanation of transactions with a foreign trust that will require your filing of Form 3520, because there are different triggers when conducting foreign transactions that will require various reporting during tax season. When filing taxes and necessary forms for your foreign transactions, it is best to consult an international tax attorney, so you can ensure all necessary forms are filed properly to avoid an audit.
Form 3520 for U.S. Recipients of Foreign Gifts
If you receive large sums of money or assets in the form of a gift, you are required to report it. These sums typically must be above $100,000, if they are gifted from a foreign individual or estate, or $15,601 if they are gifted from a foreign corporation or partnership.
Form 3520 Instructions
The filing of Form 3520 can be an intricate process, and it is typically recommended to speak with an international tax professional to assist in the proper filing of the form. The IRS suggests scheduling 12 hours to thoroughly read the instructions and file From 3520. Detailed instructions can be found on the IRS website, and a summary of instructions can be found below.
Depending on who files the form, various signatures will be needed to determine the validity. If the form is filed by an individual or fiduciary, it must be signed and dated by that individual or fiduciary. If a form is filed by a partnership, it must be signed and dated by a member of the partnership or the limited liability corporation. If a form is filed by a corporation, it must be signed by any chief corporate officer who is authorized to sign, including a president, chief tax officer, or treasurer.
Proper identifying information must be included on Form 3520. This identifying information includes:
- Taxpayer Identification Number
- Foreign Address
- Employer Identification Number, if relevant
Part one of the form involves transfers by a U.S. person to a foreign trust during the fiscal year, including obligations to a related trust, a gratuitous transfer, and outstanding qualified obligations.
Part two of the form involves U.S. owners of a foreign trust, and part three involves distributions from a foreign trust to a U.S. citizen throughout the fiscal year. This includes calculating the actual and the default distributions received. Part four involves gifts or inheritances bestowed upon U.S. citizens from certain foreign persons throughout the fiscal year.
When and Where To File Form 3520
Form 3520 is typically due on April 15, following the tax year you will be filing in regards to. However, if you are a U.S. citizen who lives outside of United States or Puerto Rico and your place of business is outside of the U.S. or you are in the military or naval duty outside of the U.S. or Puerto Rico, your Form 3520 will be due on June 15 following the tax year you will be filing in regards to. If the due date falls on a Saturday, Sunday, or bank holiday, file on the next business day.
Form 3520 and all necessary forms can be filled out and mailed to the IRS at the following address:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409
Form 3520 Penalties
If Form 3520 is not filed timely or the information is incomplete or incorrect, a penalty will occur. Penalties are typically equal to $10,000, or the greater between the below options:
- 35% of the gross value of property transferred to a foreign trust by a U.S. taxpayer.
- 35% of the gross value of assets received from a foreign trust by a U.S. citizen.
- 5% of the U.S. citizens owned foreign trust’s assets.
Dealing with an IRS penalty for incorrect or untimely filing of Form 3520 is a time-consuming and typically expensive issue. Evolution Tax and Legal can help ensure you don’t face penalties for discrepancies or untimely filing.
How Evolution Tax and Legal Can Help You File Form 3520
At Evolution Tax and Legal, our dual expertise in law and accounting makes us the perfect team to help you file your Form 3520. We are experts in international tax, understanding the intricacies necessary to file forms with no discrepancies and no chance of penalties. If you need help filing your international taxes or your Form 3520, contact the team at Evolution Tax and Legal today.