What IRS Form 3520-A (2014) Is For
IRS Form 3520-A (2014) serves as an annual information return required by the Internal Revenue Service for any foreign trust that has a U.S. owner. The form is used to report the trust’s income, assets, and distributions for income tax purposes, ensuring that the U.S. person treated as the owner under the grantor trust rules correctly reports their share of the trust’s income on their income tax return. This filing requirement enables the IRS to monitor compliance with the Internal Revenue Code and international taxation standards related to foreign trusts and their associated entities.
Review how fiduciary income tax reporting works for estates and trusts using IRS Form 1041.
When You’d Use IRS Form 3520-A (2014)
This form is required when certain ownership or reporting conditions apply to a foreign trust involving a U.S. person.
- Regular Filing: The form must be filed annually by the 15th day of the third month following the end of the trust’s tax year to report the trust’s income and activities for income tax purposes.
- Late Filing: The form must still be filed even if submitted after the due date to reduce the risk of penalties assessed for noncompliance with foreign trust reporting requirements.
- Amended Return: This version should be submitted when prior filings contain errors, incorrect figures, or missing data regarding the trust’s income, assets, or fair market value.
- Substitute Form: The U.S. owner must file a substitute form if the foreign trust fails to file Form 3520-A as required under the Internal Revenue Code.
Learn how IRS extension procedures help when a foreign trust needs more time to file.
Key Rules or Details for 2014
For tax year 2014, several essential requirements governed the completion and submission of IRS Form 3520-A (2014).
- U.S. Owner Responsibility: The U.S. owner is responsible for ensuring that the foreign trust files Form 3520-A accurately and on time; failure to comply results in significant penalties and may extend the assessment period indefinitely.
- Required Annual Statements: Each foreign trust must provide annual statements to every U.S. owner and beneficiary summarizing the trust’s income, fair market value of assets, and distributions made during the tax year.
- U.S. Agent Requirement: The trust may appoint a U.S. agent with the authority to provide records and exercise primary supervision. If no agent is appointed, comprehensive trust documents must be attached to the filing.
- Employer Identification Number: Every foreign trust must obtain a valid Employer Identification Number (EIN) and cannot use a Social Security Number for filing or identification purposes.
- Reporting in U.S. Dollars: All entries must be reported in U.S. dollars and valued using fair market principles to ensure accuracy for income tax purposes.
- Consistency Rule: All amounts reported on the trust’s filing must align with figures on the U.S. owner’s income tax return to prevent inconsistencies that could trigger an Internal Revenue Service inquiry.
Use an IRS account transcript to confirm prior-year foreign trust reporting and reconcile figures.
Step-by-Step (High Level)
Here is a structured process to help ensure that IRS Form 3520-A (2014) is filed accurately and in compliance with international reporting rules.
- Determine Filing Requirement: Verify that the trust qualifies as a foreign grantor trust with a U.S. owner, who is treated as the owner under the Internal Revenue Code and the grantor trust rules.
- Obtain an EIN: Secure a valid employer identification number for the foreign trust to properly report income, trust assets, and liabilities under U.S. tax forms.
- Appoint a U.S. Agent or Attach Documentation: Designate a qualified U.S. agent to handle records for the Internal Revenue Service; if not, attach trust agreements, ownership charts, and related documents.
- Complete Income Statement: Report all income, including interest, capital gains, dividends, and ordinary income for income tax purposes, as follows, in accordance with applicable business income tax rules.
- Prepare Balance Sheet: List all assets, liabilities, and property transferred using their fair market value to reflect the trust’s financial position accurately.
- Distribute Required Statements: Furnish the required annual statements to all U.S. owners and beneficiaries involved in the foreign trust’s operations.
- File and Submit on Time: Mail the completed form and all attachments to the Internal Revenue Service by the required due date to avoid penalties for late filing or incomplete documentation.
Request an IRS non-filing letter if the foreign trust or U.S. owner is missing historic filings.
Common Mistakes and How to Avoid Them
Errors on IRS Form 3520-A (2014) are common, and even minor inaccuracies can lead to penalties. Below are the most frequent mistakes and how to prevent them.
- Using Your SSN Instead of the EIN: Always use the foreign trust’s employer identification number to identify the entity for income tax purposes correctly.
- Missing the Due Date: File Form 7004 by March 15 to secure an extension and prevent penalties for late submission of the annual return.
- Incomplete Documentation: If no U.S. agent is appointed, attach the complete set of trust documents, including ownership charts, amendments, and any related agreements.
- Failing to Provide Owner or Beneficiary Statements: Ensure each U.S. owner and beneficiary receives a required annual statement detailing the trust’s income and fair market value of trust assets.
- Reporting in Foreign Currency: Convert all reported amounts to U.S. dollars using accurate exchange rates for the dates of transactions to maintain compliance with foreign trust reporting standards.
- Assuming the Trustee Will File: The U.S. owner must exercise primary supervision and confirm that the foreign trust files the form on time to meet reporting obligations.
- Inconsistent Reporting Between Forms: When values differ between Form 3520 and Form 3520-A, submit Form 8082 to explain the discrepancy and avoid penalties.
Understand the IRS collection process if foreign trust penalties or unpaid taxes arise.
What Happens After You File IRS Form 3520-A (2014)
Once IRS Form 3520-A (2014) is filed, the Internal Revenue Service reviews the return to confirm that all figures match the U.S. owner’s Form 3520 and income tax return. If the information is consistent and complete, the filing is recorded without issue. However, incomplete or inconsistent filings may trigger an IRS notice or request for clarification.
FAQs
What is the difference between Form 3520 and IRS Form 3520-A (2014)?
Form 3520 reports transactions, foreign gifts, and certain foreign persons’ involvement with foreign trusts, while IRS Form 3520-A (2014) provides an annual return detailing the foreign trust’s assets, income, and property transferred for tax purposes.
What happens if a foreign trust fails to file Form 3520-A?
If a foreign trust fails to file Form 3520-A, the U.S. owner must file a substitute form to avoid penalties. The penalty equals the greater of $10,000 or 5% of the trust’s gross value. Continued noncompliance may also trigger additional review of the foreign trust’s assets and related foreign corporations.
Are there exemptions for foreign estates or tax-favored foreign trusts?
Certain tax-favored foreign trusts, including a Canadian retirement plan or other recognized foreign estates, may qualify for exceptions under the Internal Revenue Code. However, such individuals may still be required to file Form 3520 to fulfill reporting obligations related to foreign assets or foreign financial assets.
How are foreign partnerships or foreign non-grantor trusts reported?
A foreign partnership or a foreign non-grantor trust must disclose relevant income and trust property transactions if a U.S. person is treated as the owner or beneficiary. This includes assets where the trust’s assets are treated as transferred property or indirectly transferred property during the tax year.
