Instructions for Filling Out Form 3520

This document offers official IRS instructions for completing Form 3520, "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts," for the tax year ending December 2023. It provides a comprehensive guide for individuals, estates, and entities to report transactions with foreign trusts and the receipt of large gifts or bequests from foreign entities or individuals.

In this article, we'll provide information on Form 3520 and a step-by-step guide on how to fill it out, keeping it straight to the point.

What is Form 3520?

Form 3520, titled "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts," is used by U.S. persons, estates, and executors to report specific transactions with foreign trusts, ownership of foreign trusts under the rules of sections 671 through 679, and the receipt of certain large gifts or bequests from foreign persons. The primary purpose of this form is to ensure compliance with U.S. tax laws by reporting the creation of a foreign trust, transfers of money or property to a foreign trust, ownership of a foreign trust, and the receipt of distributions from a foreign trust. Additionally, it is used to report the receipt of large gifts or bequests from certain foreign persons. Penalties may apply for failure to file, failure to report all required information, or for including incorrect information.

Who Must File Form 3520?

Form 3520 must be filed by U.S. persons, including executors of estates of U.S. decedents, who engage in certain transactions with foreign trusts, own foreign trusts under the rules of sections 671 through 679, or receive specific large gifts or bequests from certain foreign persons. Scenarios requiring filing include reporting a reportable event, transferring property to a related foreign trust, being treated as the owner of any part of a foreign trust's assets, receiving a distribution from a foreign trust, receiving a loan or using trust property, and receiving gifts or bequests exceeding certain thresholds from nonresident alien individuals, foreign estates, foreign corporations, or foreign partnerships.

Form 3520 Tax Filing Deadlines and Due Dates

• General Due Date: Form 3520 is generally due on the 15th day of the 4th month following the end of the U.S. person's tax year. If an extension is granted for filing the income tax return, Form 3520 is due no later than the 15th day of the 10th month following the end of the U.S. person's tax year.
• Due Date for Individuals Living Outside the U.S.: If an individual is a U.S. citizen or resident who lives outside of the United States and Puerto Rico and their place of business or post of duty is outside the United States and Puerto Rico, or they are in the military or naval service on duty outside the United States and Puerto Rico, the due date is the 15th day of the 6th month following the end of their tax year. If an extension is granted, the due date is no later than the 15th day of the 10th month following the end of the tax year.
• Due Date for U.S. Decedents: For a U.S. decedent, the due date is the 15th day of the 4th month following the end of the decedent's last tax year for income tax purposes. If an extension is granted for the decedent's income tax return, then the due date for filing Form 3520 is no later than the 15th day of the 10th month following the end of the decedent’s last tax year.
• Due Date for U.S. Decedent's Estate: For a U.S. decedent's estate, the due date is the 15th day of the 4th month following the end of the estate's tax year for income tax purposes. If an extension is granted for the estate's income tax return, then the due date for filing Form 3520 is no later than the 15th day of the 10th month following the end of the estate’s tax year.

Form 3520 Late Payment Penalty

For late payment or failure to file Form 3520, the initial penalty is the greater of $10,000 or 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I, 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III, or 5% of the gross value of the portion of the foreign trust's assets treated as owned by a U.S. person under the grantor trust rules if the foreign trust fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries, or does not furnish all of the information required by section 6048(b) or includes incorrect information. Additional penalties are imposed if noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.

Step-by-Step Instructions for Form 3520

Step by step instructions for filling out Form 3520 include:

1. Period Covered: Indicate the tax year for which the form is being filed.
2. Item A - Initial Return, Final Return, Amended Return: Indicate the type of return being filed.
3. Identifying Information: Provide the required identifying information, including names, addresses, and Taxpayer Identification Numbers (TINs).
4. Part I - Transfers by U.S. Persons to a Foreign Trust During the Current Tax Year: Complete this part if you are reporting a reportable event such as the creation of a foreign trust or transfer of property to a foreign trust.
5. Schedule A - Obligations of a Related Trust: Fill out this schedule if applicable.
6. Schedule B - Gratuitous Transfers: Complete this schedule for gratuitous transfers to a foreign trust.
7. Part II - U.S. Owner of a Foreign Trust: This part is for U.S. persons treated as the owner of any part of a foreign trust's assets.
8. Part III - Distributions to a U.S. Person From a Foreign Trust During the Current Tax Year: Complete this part if you received distributions from a foreign trust.
9. Part IV - U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons: This part is for reporting gifts or bequests received from foreign persons.
10. Notices: Review the Privacy Act and Paperwork Reduction Act Notice at the end of the instructions.

Each section of the form requires detailed information about the transactions, the trust, and the parties involved. The instructions also emphasize the importance of attaching additional documentation when necessary, such as trust agreements or financial statements of the trust. Penalties for non-compliance are highlighted throughout the instructions, underscoring the importance of accurate and timely filing.

How to Submit Form 3520

To submit Form 3520, first determine if you need to file based on your transactions with foreign trusts or receipt of certain foreign gifts. Gather all necessary information and documents, then complete the form following the specific instructions provided for each part. Sign the form, verifying that all information provided is complete and correct. Finally, mail the completed form to the IRS at the address provided in the instructions, adhering to the specified filing deadline. Remember to accurately report all required information, be aware of filing deadlines, and keep a copy of the submitted form and supporting documents for your records.

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