What IRS Form 3520 (2012) Is For
IRS Form 3520 (2012) is an informational return used by a U.S. person to report transactions involving foreign trusts and foreign gifts or bequests received from foreign persons, corporations, or estates. The Internal Revenue Service (IRS) uses this form to ensure transparency and compliance with U.S. income tax laws related to foreign financial assets. While filing this form does not automatically create a tax liability, it fulfills a critical reporting obligation for individuals with specified foreign financial assets, helping the IRS track reportable income effectively connected to foreign sources.
Review how fiduciary income tax reporting works for estates and trusts using IRS Form 1041.
When You’d Use IRS Form 3520 (2012)
IRS Form 3520 (2012) must be filed when specific foreign transactions occur that create reporting obligations under U.S. tax law.
- Transfers to a Foreign Trust: You must report any creation of or transfer of money or property to a foreign trust, whether for investment or asset protection purposes, to comply with applicable law.
- Ownership of a Foreign Grantor Trust: You must report ownership of a foreign grantor trust when you are treated as an owner under the grantor trust rules and must disclose related income and capital gains for income tax purposes.
- Receiving Distributions: You must report any distributions, loans, or use of property received from a foreign non-grantor trust, as these may have income tax and reporting implications.
- Receiving Certain Foreign Gifts or Bequests: You must file Form 3520 if you receive more than $100,000 from a foreign person or foreign estate, or if gifts from a foreign corporation or partnership exceed the annual threshold for the tax year.
- Amended or Late Filings: You must submit the form promptly if you are correcting errors or filing late, and include a written explanation to demonstrate reasonable cause and avoid penalties.
Learn how IRS extension procedures help when you need more time to file foreign trust or foreign gift reports.
Key Rules or Details for the 2012 Tax Year
For the 2012 tax year, the Internal Revenue Code established specific rules and reporting thresholds that apply to IRS Form 3520 (2012).
- Foreign Gift Thresholds: You must report gifts or bequests exceeding $100,000 received from a foreign person or foreign estate, and more than $14,723 from a foreign corporation or partnership during the tax year.
- Qualified Obligations: A transfer to a foreign trust in exchange for a written obligation is only considered qualified if it meets the conditions for a qualified obligation, such as a maximum term of five years and denomination in U.S. dollars.
- Foreign Grantor Trust Ownership: You must attach the required annual statements, such as Form 3520-A or an acceptable substitute, when you are treated as the owner for income tax purposes.
- Due Date and Mailing Address: You must file Form 3520 by the same due date as your income tax return and mail it to the Ogden Service Center for timely processing.
- Penalty Avoidance and Compliance: You can avoid penalties by filing accurately, maintaining documentation, and demonstrating reasonable cause if delays occur under applicable law.
Use an IRS account transcript to verify foreign trust transactions and reconcile reporting between Forms 3520 and 3520-A.
Step-by-Step (High Level)
The filing process for IRS Form 3520 (2012) requires careful attention to detail and compliance with the IRS’s reporting requirements.
- Determine Relevant Parts: Identify the parts of the form that apply based on your relationship with the foreign trust or the type of transaction that occurred during the tax year.
- Complete Identifying Information: You must include your name, address, and either your individual taxpayer identification number (ITIN) or employer identification number (EIN), as well as the foreign trust’s identifying details.
- Provide Accurate Transaction Details: You must report dates, property descriptions, and fair market values for all transfers, distributions, or gifts to ensure accurate tax reporting and proper recognition of capital gains.
- Attach Required Documentation: You must include relevant contracts, trust financial statements, or documentation proving qualified obligations when applicable.
- Sign and File Form 3520: You must sign, date, and mail the completed form to the IRS, ensuring that all entries align with your income tax return to prevent reporting discrepancies.
Request an IRS non-filing letter if earlier filings involving foreign trusts or foreign gifts are missing.
Common Mistakes and How to Avoid Them
Avoiding these common errors can help you comply with IRS Form 3520 (2012) foreign trust reporting requirements and reduce the risk of penalties.
- Not Realizing You Must File: Many U.S. persons fail to recognize their filing obligation; always verify whether transactions with a foreign person, estate, or trust create a reporting requirement under the Internal Revenue Code.
- Ignoring Related-Party Aggregation Rules: You must combine gifts received from related foreign persons, as dividing amounts among relatives or entities does not exempt you from filing obligations.
- Claiming a Non-Qualified Obligation: You should not assume a loan or payment agreement from a foreign trust is qualified unless it meets all IRS criteria, including interest rate and term limitations.
- Missing Documentation: You must include all supporting materials, such as the trust’s financial statements and beneficiary information, ensuring they are in English or translated correctly.
- Incorrect Valuations: You must report the fair market value of property or assets, not the cost basis, and support these values with appraisals or documentation consistent with IRS valuation rules.
Understand how the IRS collection process works if penalties or assessments arise from foreign trust reporting.
What Happens After You File IRS Form 3520 (2012)
After filing IRS Form 3520 (2012), the Internal Revenue Service processes it at the Ogden Service Center and reviews it for accuracy and consistency with your income tax return. The IRS may contact you for clarification or to request missing trust documentation. If you reported qualified obligations, the assessment period may be extended under applicable law. Failing to file completely or accurately can result in penalties, interest, or additional reporting obligations. Keeping records, proof of mailing, and timely responses to IRS inquiries will help you maintain compliance and avoid unnecessary tax issues.
FAQs
Is IRS Form 3520 (2012) a tax return or an information form?
IRS Form 3520 (2012) is not a tax return but an informational filing that reports transactions with foreign trusts and foreign gifts or bequests. It helps the Internal Revenue Service track specified foreign financial assets, foreign financial accounts, and foreign financial interests for accurate tax reporting and compliance under U.S. tax law.
Are foreign trusts taxed differently from domestic trusts?
Yes. Foreign trusts taxed under the Internal Revenue Code may face different treatment from domestic trusts, depending on income effectively connected to U.S. sources. Distributable net income, taxable income, and effectively connected income are calculated based on whether the trust qualifies as a foreign grantor trust or a foreign non-grantor trust for income tax purposes.
Who qualifies as a U.S. beneficiary or owner of a foreign trust?
A U.S. beneficiary or U.S. owner includes any U.S. person who has a financial interest in a foreign trust or who can exercise primary supervision or substantial decisions over the trust’s management or distributions. Determination is based on the control test and court test applied under the Internal Revenue Code and applicable law.
What if I receive gifts from a nonresident alien individual or foreign corporation?
You must file Form 3520 if you receive foreign gifts or bequests exceeding the annual threshold from a nonresident alien individual, foreign corporation, or foreign country. These transactions can affect your gross income or capital gains calculations if they are related to income effectively connected with a U.S. trade or business.
