What IRS Form 3520-A (2012) Is For
IRS Form 3520-A (2012) is an informational document that the Internal Revenue Service requires from foreign trusts with at least one U.S. owner. Its primary purpose is to ensure that foreign financial activities related to these trusts are disclosed adequately for U.S. tax purposes. The form provides a detailed record of the foreign trust’s assets, income, and beneficiaries, allowing the IRS to determine how those activities affect a U.S. person’s tax obligations.
This form is not a tax return but an annual information return used to maintain compliance with the Internal Revenue Code. It ensures that income derived from foreign trust assets, specified foreign financial assets, or foreign financial accounts is correctly reported and taxed. Review how fiduciary income tax reporting works for estates and trusts using IRS Form 1041.
When You’d Use IRS Form 3520-A (2012)
This form is required whenever a foreign trust has a U.S. connection that triggers disclosure or tax reporting under the Internal Revenue Code.
- You are a U.S. person who owns a foreign trust: A U.S. citizen, resident, or domestic corporation must ensure the foreign trust files Form 3520-A to meet annual return and reporting obligations.
- You receive distributions or certain transfers from a foreign trust: Any distribution or transfer made to a U.S. person must be reported for income tax purposes, reflecting the fair market value of what was received.
- You are required to complete Form 3520 for related transactions: Form 3520-A provides the necessary tax information to complete Form 3520 accurately, especially when determining grantor trust income and tax consequences.
- You are maintaining compliance with international reporting standards: Filing Form 3520-A fulfills foreign trust reporting requirements established under Treasury regulations and prevents additional penalties for non-compliance.
Learn how IRS extension procedures can provide more time to file foreign trust reports when needed.
Key Rules or Details for 2012
These rules determine who must file IRS Form 3520-A (2012), how to identify a foreign trust, and what special conditions apply under U.S. tax law.
- Definition of a Foreign Trust: A trust is considered foreign if it fails either the court test or the control test, meaning it does not have primary supervision by a U.S. court or substantial decisions controlled by U.S. persons.
- U.S. Agent Requirement: Each foreign trust must appoint a U.S. agent authorized to act on its behalf for examination purposes, as failing to do so allows the IRS to determine tax liability without the trust’s input.
- HIRE Act Changes: Beginning March 18, 2010, any loan or property use between a foreign trust and a U.S. person that lacks fair market repayment terms may cause the trust to be treated as having U.S. beneficiaries.
- Canadian Plan Exception: Certain Canadian retirement plans, such as RRSPs and RRIFs, are exempt from filing Form 3520-A when the U.S. owner files Form 8891 under applicable treasury regulations.
- EIN Requirement: Every foreign trust must obtain an Employer Identification Number rather than using an individual taxpayer identification number to file Form 3520-A with the Internal Revenue Service properly.
Use an IRS account transcript to verify prior-year trust activity and cross-check foreign trust reporting.
Step-by-Step (High Level)
Completing IRS Form 3520-A (2012) requires careful organization and accurate financial documentation to meet the IRS filing requirements.
- Gather Information: Collect trust deeds, financial statements, and documentation detailing all foreign trust assets, income effectively connected to U.S. sources, and distributions made to beneficiaries during the tax year.
- Determine U.S. Agent Status: Decide whether to appoint a U.S. agent, such as a domestic corporation or U.S. person, to act for examination purposes and ensure primary supervision of reporting activities.
- Complete General Information Section: Provide accurate identifying details about the trust, including the country of formation, Employer Identification Number, and information on all U.S. owners and beneficiaries.
- Report Trust Income: Record all sources of income, including interest, dividends, capital gains, and other income, in accordance with U.S. income tax principles to determine total taxable income.
- Prepare Balance Sheet: List all assets and liabilities at fair market value as of the end of the tax year to show the trust’s overall equity position for tax purposes.
- Distribute Owner and Beneficiary Statements: Provide each U.S. owner and beneficiary of a foreign trust with their individualized statement reflecting their share of trust income, expenses, and capital gains.
- Sign and File Form 3520-A: Ensure an authorized individual, such as a trustee or corporate officer, signs the completed form and submits it to the Internal Revenue Service by the required due date.
Request an IRS non-filing letter when historic trust filings or documentation are missing.
Common Mistakes and How to Avoid Them
Understanding these common mistakes and knowing how to prevent them ensures compliance with foreign trust reporting requirements.
- Failing to File Form 3520-A: A foreign trust with a U.S. owner must file the annual return, and if the trustee fails to do so, the U.S. owner should file a substitute return to avoid penalties.
- Not Appointing a U.S. Agent: Every foreign trust is required to appoint a U.S. agent authorized to act on behalf of the IRS for examination purposes, which prevents the IRS from making independent tax determinations.
- Using Incorrect Identification Numbers: A foreign trust must use an Employer Identification Number rather than a Social Security Number or an Individual Taxpayer Identification Number when submitting the annual return.
- Incomplete or Inaccurate Financial Reporting: Trust income, expenses, and foreign financial assets must be reported under U.S. income tax principles to ensure full disclosure of taxable income.
Understand the IRS collection process if foreign trust penalties or back taxes are assessed.
What Happens After You File
Once IRS Form 3520-A (2012) is submitted, the Internal Revenue Service reviews it to verify compliance with foreign trust reporting and U.S. income tax laws. The data provided ensures that trust activities align with information reported on Form 3520 by U.S. owners and beneficiaries.
The IRS uses this information to monitor specified foreign financial assets, foreign bank accounts, and trust distributions for accuracy and completeness. U.S. persons should retain copies of all filings, beneficiary statements, and supporting documentation for at least three years.
FAQs
Are foreign bank or financial accounts reported on IRS Form 3520-A (2012)?
Yes, any foreign estate bank or financial accounts held by a foreign trust must be included when reporting foreign trust assets. These financial accounts are considered specified foreign financial assets under the Internal Revenue Code and must be disclosed for tax purposes and accurate income tax reporting.
How does the form relate to other filing obligations, such as FinCEN Form 114 or Form 3520?
IRS Form 3520-A (2012) is separate from FinCEN Form 114, which covers signature authority and the reporting of foreign accounts; however, both forms help ensure the transparency of offshore assets. U.S. persons file Form 3520 to report transactions or certain transfers involving a foreign trust.
How do domestic partnership or nonresident alien individual transactions affect reporting?
Any transfer of property or income between a foreign trust and a domestic partnership, or a nonresident alien individual, must be adequately disclosed under Treasury regulations. These relationships may affect the trust’s taxable income, financial interest reporting, and overall tax consequences.
Can the IRS impose penalties for offshore scheme promoters or noncompliance?
Yes, the Internal Revenue Service may impose penalties on promoters of offshore schemes, as well as U.S. persons and foreign persons who fail to meet their reporting obligations.
