There are many different types of international information reporting forms that a US Person may have to file when they have ownership over foreign accounts, assets, investments, entities, and trusts. For the US Owner of a Foreign Trust, one of the main forms (but not only form) they have to file is Form 3520-A. Form 3520-A is the Annual Information Return of Foreign Trust with a U.S. Owner (under section 6048(b)). The form is one of the more complicated reporting vehicles for overseas assets. That is because unlike the FBAR or Form 8938 (FATCA), which focuses more on just reporting the high-balance and associated income, Form 3520-A is a tax return for the trust – similar in concept to IRS Form 1041 – and therefore it has several moving parts associated with the annual foreign trust reporting requirements.
The first and most important aspect of foreign trust reporting is to determine whether or not you even have a foreign trust in the first place – which can be harder than it seems. Different countries have different rules and requirements as to what qualifies as a trust. For example, in some countries, a person may use a structure such as a Sociedad Anonima for asset protection — and while it was created for trust-like purposes — from a US tax perspective, it may be considered a corporation and not a trust and require different reporting on Form 5471. Likewise, a Stiftung that is not considered a foreign trust per se, can be deemed a foreign trust for US tax and reporting purposes.
The starting point with foreign trust reporting, as with any type of international information reporting, should determine what the statute is and what corresponding IRS form(s) must be filed. Which foreign trust reporting, taxpayers should refer to Internal Revenue Code section 6048. The code section breaks down who is required to report, what is required to be included in the reporting form, and what happens when taxpayers fail to report timely.
By way of comparison, for a US-based trust, taxpayers file Form 1041 instead of Form 3520-A. Depending on the complexity of an estate plan, there may be some overlap so taxpayers should be aware of whether or not their trust is actually a US trust or a foreign trust. Oftentimes, nuances within the trust language can take what looks like a US-based trust and transmute it into a foreign trust.
Let’s go through the basics of the Form 3520-A content to get a baseline understanding of the type of information that needs to be reported:
As with most international information reporting forms, the first part of Form 3520-A refers to general information about the name of the trust, the location of the trust, and the day that the trust is formed. There is also additional information about whether or not a US agent was appointed. Oftentimes having a US agent is a benefit to a foreign trust because it can minimize the amount of reporting and documentation that needs to be provided to the IRS.
The next portion of the reporting involves the foreign trust income statement. This is where taxpayers will have to roll up their sleeves and dive into the more complex aspect of foreign trust reported. Depending on the type of foreign trust and whether this information is even available, taxpayers must do their best to provide information about the income generated in the foreign trust. As you can see from the form, the usual cast of income characters is included – such as interest, dividends, rent, gains, and other income. In addition, the taxpayer must also provide information regarding expenses and other distributions from the trust.
The third part of Form 3520-A is the balance sheet. This is important, to show that the assets equal liabilities plus equity. Again, depending on how much information is actually available from the foreign trust will dictate how thorough the taxpayer is when preparing this form. One very important concept to keep in mind is the idea of diligence. Completing Form 3520-A — or any other international information reporting form for that matter — is not a test and you are not graded on the outcome. The idea is to do a diligent and reasonable search sufficient to obtain as much information you can to prepare the form as accurately as possible so that if the IRS was ever to come knocking on your door, you can explain what you did to try to obtain the information to the best of your abilities.
In addition to completing the main Form 3520-A, there are also other ancillary forms that taxpayers may have to file depending on what their relationship is to the trust, the type of trust (grantor versus non-grantor), and other related issues. Let’s take a look at some of these other forms.
When a taxpayer is a grantor of a foreign trust, they are required to complete an additional form submitted with Form 3520-A referred to as a Foreign Grantor Trust Owner Statement. The form requires each US person owner of the trust to prepare their own statement unless the trustee already prepared a statement for them. They must identify information regarding the trust: if an agent was appointed, the portion of the trust deemed owned by the specific US person, and how much cash or other fair market value property was distributed to the owner.
The trustee or the owner must also prepare a separate statement for each specific US beneficiary that had received a distribution from the trust. This form is similar to the foreign grantor trust owner statement, aside from the fact that it does not require as detailed an income breakdown that it does for the owner.
Some taxpayers may be able to sidestep or circumvent the reporting requirements on Form 3520-A. The two main exceptions involve Revenue Procedure 2020–17 and Revenue Procedure 2014–55.
Revenue Procedure 2020–17 refers specifically to pension and other tax-deferred retirement and non-retirement savings. In reality, the IRS is not really seeking taxpayers who have an ownership interest in foreign pension plans or other deferred investments (that may technically qualify as a trust) to report the asset on Form 3520-A. Especially since these types of accounts are usually already reported on FATCA Form 8938 and the FBAR – and the IRS is seeking to minimize the heavy burden of duplicative reporting when possible.
Revenue Procedure 2014-55 deals specifically with RRSPs and RRIFs from Canada and specifically exempts these two types of retirement savings from having to be reported on Form 3520 or 3520-A as a foreign trust.
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 that specializes exclusively in these types of offshore disclosure matters.
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 of the Streamlined Procedures. 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.
