What Form 3520 Is For

Form 3520 can seem intimidating at first glance, but it's simply an information return that helps the IRS track certain international financial activities. Whether you've received a generous gift from overseas relatives, inherited property from a foreign estate, or have dealings with a foreign trust, this guide will help you understand when and how to file this important form for the 2010 tax year.

Form 3520 serves as the IRS's window into your international financial relationships. Think of it as a disclosure form rather than a tax return—you're reporting transactions, not necessarily calculating taxes owed (though some transactions may have tax consequences elsewhere on your return).

The form covers four main scenarios outlined in its four parts. Part I deals with transfers you made to a foreign trust, such as funding a trust or moving assets into it. Part II addresses situations where you're considered the "owner" of a foreign trust under U.S. tax law, meaning you control the trust's assets and must report them even if there were no transactions during the year. Part III covers distributions (payments or property) you received from a foreign trust. Part IV handles large gifts or inheritances you received directly from foreign individuals, estates, corporations, or partnerships—not from trusts. IRS.gov

A critical point: this is an information return, not a tax return. Filing Form 3520 doesn't automatically mean you owe tax. However, failing to file when required triggers substantial penalties. The form helps the IRS ensure that income from foreign sources gets properly reported on your regular tax return and that international transactions comply with U.S. tax laws.

For 2010 specifically, several changes under the Hiring Incentives to Restore Employment (HIRE) Act modified reporting requirements and penalties. These changes, effective after March 18, 2010, expanded the circumstances under which foreign trusts are treated as having U.S. beneficiaries and increased scrutiny on loans and uncompensated use of trust property. IRS.gov

When You’d Use Form 3520 (Including Late and Amended Filings)

Standard Filing Deadline

Form 3520 is due on the same date as your income tax return, including extensions. For most individual taxpayers, this means April 15, 2011, for the 2010 tax year. If you received an extension to file your 1040, your Form 3520 deadline extends to October 15, 2011. The form must be mailed to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. IRS.gov

Special Situations

If you're a U.S. citizen or resident living abroad or in military service outside the U.S., you automatically get until June 15, 2011, to file (with extensions potentially extending to December 15, 2011). Executors filing for deceased U.S. persons have different deadlines tied to the estate's filing requirements.

Late Filing

If you missed the deadline, file as soon as possible. The IRS doesn't have a formal "late filing amnesty" program specifically for Form 3520, but demonstrating reasonable cause can help mitigate penalties. Reasonable cause means you acted in good faith and couldn't file on time despite exercising ordinary care. Valid reasons might include serious illness, natural disaster, or unavoidable absence. Note that foreign law prohibiting disclosure or a foreign trustee's reluctance to provide information does not constitute reasonable cause. IRS.gov

Amended Returns

If you discover errors or omissions on a previously filed Form 3520, file an amended return by checking the "Amended return" box on page 1. Include a complete explanation of what you're correcting and why. Common reasons for amendments include discovering additional transactions, correcting valuation errors, or providing information that was incomplete on the original filing. Attach supporting documentation and clearly mark which information has changed.

Key Rules for 2010

Several specific thresholds and rules applied in the 2010 tax year:

Gift Reporting Thresholds

You must file Part IV if you received more than $100,000 in gifts or bequests from a nonresident alien individual or foreign estate during 2010. The threshold for gifts from foreign corporations or partnerships was $14,165 in 2010. These thresholds aggregate gifts from related foreign persons—you can't avoid reporting by splitting gifts among family members. IRS.gov

Trust Owner Reporting

If you're treated as the owner of any portion of a foreign trust under IRC sections 671-679, you must complete Part II even if there were no transactions during 2010. This requirement was explicitly confirmed by the HIRE Act. The foreign trust should provide you with Form 3520-A (Foreign Grantor Trust Owner Statement). If the trust fails to provide this, you must create and attach a substitute Form 3520-A to avoid penalties. IRS.gov

Qualified Obligations

For 2010, if you transferred property to a foreign trust in exchange for an obligation (like a note or loan), that obligation must meet strict "qualified obligation" criteria to avoid being treated as a taxable gift. Requirements include a maximum 5-year term, denominated in U.S. dollars, interest rates between 100%-130% of the applicable federal rate, and an agreement to extend the statute of limitations. IRS.gov

HIRE Act Changes (Effective after March 18, 2010)

After this date, if a foreign trust loans cash or marketable securities to a U.S. person (or allows uncompensated use of trust property), and the U.S. person doesn't repay at market rates or pay fair market value for the use, the transaction creates a deemed distribution and may cause the trust to be treated as having a U.S. beneficiary. This expanded IRS authority to catch indirect benefits from foreign trusts.

Step-by-Step (High Level)

Step 1: Determine Which Parts Apply

Review the four checkboxes on page 1 to identify which parts you need to complete. You might need multiple parts—for example, if you both transferred property to a trust and received a distribution from it.

Step 2: Gather Documentation

Collect trust documents, bank statements, gift letters, transfer records, and valuations. For trust property, obtain contemporaneous fair market value appraisals or good-faith estimates with supporting documentation. For foreign gifts, get written statements from donors confirming the amount, date, and nature of the gift.

Step 3: Complete Identifying Information

Fill in lines 1-4 on page 1 with your personal information and the foreign trust's details. If the trust has appointed a U.S. agent (a U.S. person authorized to respond to IRS requests), provide that information on lines 3a-3g. Having a U.S. agent can facilitate IRS communications.

Step 4: Complete Applicable Parts

Part I (Transfers): Report the creation of or transfers to foreign trusts. Schedule A covers obligations received, Schedule B covers gratuitous (gift-like) transfers, and Schedule C tracks qualified obligations from prior years still outstanding.
Part II (Owner): If you're treated as owning the trust, report the gross value of your ownership share and attach the Form 3520-A statement from the trust (or a substitute if the trust didn't provide one).
Part III (Distributions): Report money or property received from foreign trusts. You'll calculate whether distributions are taxable using either the "default method" (Schedule A) or "actual method" (Schedule B) if the trust provided detailed information. Schedule C calculates interest charges on accumulation distributions.
Part IV (Foreign Gifts): List each foreign gift over $5,000 that contributes to exceeding the reporting thresholds, including donor information and gift descriptions.

Step 5: Calculate Any Tax Consequences

While Form 3520 itself doesn't calculate tax, some transactions have tax implications. For example, distributions from foreign nongrantor trusts often trigger "accumulation distribution" rules requiring Form 4970 calculations and interest charges. Transfer these amounts to your Form 1040.

Step 6: Review and Mail

Double-check all calculations, ensure all required attachments are included (trust documents, Form 3520-A statements, gift documentation), sign and date page 1, and mail to the Ogden Service Center address listed above.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Because You Thought Gifts Aren't Taxable

Many people don't realize that even though foreign gifts generally aren't taxable income, they still trigger reporting requirements at certain thresholds. Solution: Remember that Form 3520 is about disclosure, not taxation. File whenever you exceed the thresholds, even if you owe no tax.

Mistake #2: Failing to Aggregate Related Donors

The $100,000 threshold applies to the total from a nonresident alien and all persons related to that individual. A gift of $60,000 from your mother abroad plus $50,000 from your foreign aunt (related to your mother) totals $110,000 and triggers reporting. Solution: Add up all gifts from related foreign persons before determining if you've crossed the threshold. IRS.gov

Mistake #3: Not Filing Part II When You Own a Foreign Trust

U.S. owners often skip Part II if the trust had no transactions during the year. The 2010 HIRE Act specifically clarified this is required regardless of activity. Solution: File Part II every year you're a trust owner, even for dormant trusts. Attach the Form 3520-A statement or a substitute if the trust didn't provide one.

Mistake #4: Incomplete or Missing Trust Documentation

Failing to attach required trust instruments, amendments, and agreements leads to the form being considered incomplete, triggering penalties. Solution: If you attached these documents to a Form 3520 or 3520-A within the previous three years, you can simply reference the prior filing year rather than reattaching. Otherwise, include all trust documents.

Mistake #5: Incorrect Valuation Methods

Using cost basis instead of fair market value, or failing to keep contemporaneous valuation records, causes reporting errors. Solution: Value all property at fair market value as of the transaction date using section 2031 estate tax valuation principles. Document your valuation method contemporaneously—waiting until audit time is too late.

Mistake #6: Missing the Reasonable Cause Deadline

Waiting too long to file delinquent forms makes reasonable cause claims harder to sustain. Solution: If you discover unfiled Forms 3520, file immediately and include a detailed reasonable cause statement explaining the delay. The IRS may assess penalties initially but will consider your explanation during review.

Mistake #7: Confusing Form 3520 with FBAR or Form 8938

Foreign bank accounts and assets trigger separate reporting on FinCEN Form 114 (FBAR) and Form 8938. These have different thresholds, deadlines, and penalties. Solution: Treat each form independently. You may need to file multiple forms for the same foreign trust or account.

What Happens After You File

Processing Timeline

Form 3520 is an information return processed to the IRS Business Master File under Master File Tax code 68. Unlike tax returns with refunds, you won't receive acknowledgment of receipt or a "processed" notice. The form enters the IRS system and becomes part of your permanent file for potential matching with other information returns. IRS.gov

IRS Review

The IRS uses Form 3520 to cross-reference your income tax return. For example, if you report receiving a $200,000 distribution on Part III, examiners check whether you properly reported the associated income on Form 1040. Discrepancies may trigger correspondence or examination.

Statute of Limitations Impact

Filing a complete and accurate Form 3520 starts the normal three-year statute of limitations for IRS assessment related to those transactions. However, if you don't file or file an incomplete form, the statute remains open indefinitely for those transactions under IRC section 6501(c)(8). This means the IRS can examine and assess taxes related to unreported foreign trust transactions decades later. IRS.gov

Potential Follow-Up

You might receive IRS letters requesting clarification or additional documentation, especially if the form triggers automated matching programs. Common requests include substantiation of gift valuations, proof of donor relationships, or trust governing documents. Respond promptly to avoid escalation to formal examination.

No Immediate Tax Bill

Filing Form 3520 itself doesn't generate a tax bill. Any taxes owed from reported transactions should be calculated on your Form 1040 (or other applicable returns). However, penalty assessments for late or incomplete filing appear separately from income taxes.

Coordination with Form 3520-A

If you reported ownership in Part II, the IRS expects the foreign trust to file Form 3520-A by the 15th day of the third month after the trust's year-end. Discrepancies between your Form 3520 and the trust's Form 3520-A may prompt IRS inquiry.

FAQs

Q1: I received $95,000 from my mother in France. Do I need to file Form 3520?

No, not for this gift alone. The threshold for gifts from a nonresident alien individual is more than $100,000. However, if you received any other gifts from your mother or persons related to her during 2010, you must aggregate them. If the total exceeds $100,000, you must file Part IV.

Q2: Are foreign gifts taxable income?

Generally, no. Under U.S. tax law, gifts and inheritances are not taxable income to the recipient, whether from domestic or foreign sources. The donor might owe gift tax, but that's not your responsibility. Form 3520 is purely informational—it helps the IRS verify that large transfers from abroad are truly gifts and not disguised taxable income.

Q3: What penalties apply if I file late or incompletely?

For 2010, penalties are substantial. For failure to report transfers to foreign trusts (Part I), the penalty is the greater of $10,000 or 35% of the gross value transferred. For failure to report distributions (Part III), it's the greater of $10,000 or 35% of the distribution. For failure to report foreign gifts (Part IV), the penalty is 5% per month (up to 25% maximum) of the unreported gift amount. If the foreign trust fails to file Form 3520-A and you don't file a substitute, the penalty is the greater of $10,000 or 5% of the trust's gross value. Additional continuation penalties apply if non-compliance continues after IRS notice. IRS.gov

Q4: Can I claim "reasonable cause" to avoid penalties?

Yes, but the standard is strict. Reasonable cause means you acted in good faith with ordinary business care but couldn't comply due to circumstances beyond your control. Valid examples include serious illness, natural disaster, death in the family, or unavoidable absence. Importantly, foreign law prohibiting disclosure, foreign trustee refusal to cooperate, or trust provisions restricting information are not reasonable cause. Attach a detailed statement explaining your reasonable cause when filing a late return. IRS.gov

Q5: I'm a U.S. owner of a foreign trust that had no activity in 2010. Do I still need to file?

Yes. The HIRE Act specifically clarified that U.S. owners must file Part II of Form 3520 every year they own any portion of a foreign trust, even if there were no transactions. You must also ensure the foreign trust files Form 3520-A or attach a substitute to your Form 3520. This is one of the most commonly missed requirements. IRS.gov

Q6: What's the difference between a foreign trust distribution and a foreign gift?

Distributions from foreign trusts are reported on Part III and often have complex tax consequences under accumulation distribution rules. Direct gifts from foreign individuals (not through trusts) are reported on Part IV and generally have no tax consequence. The key distinction: a trust is a legal entity separate from individuals. If funds pass through a trust structure, even briefly, they're typically distributions rather than direct gifts.

Q7: How do I value property received from or transferred to a foreign trust?

Use fair market value determined under IRC section 2031 and 2512 estate and gift tax regulations. This is what a willing buyer would pay a willing seller, neither being under compulsion. For publicly traded securities, use the average of high and low prices on the transaction date. For real estate, jewelry, art, or business interests, consider getting professional appraisals. Keep contemporaneous records of your valuation method and supporting documentation. The IRS can challenge unreasonable valuations and assess penalties on underreported amounts. IRS.gov

Notes

Final Thoughts
Form 3520 for 2010 represents a critical compliance obligation for U.S. persons with foreign trust involvement or large foreign gifts. The form's complexity stems from the variety of international structures and transactions it covers, but breaking it down into its four distinct parts makes it manageable. The key is recognizing when filing is required, gathering complete documentation, and understanding that this is about disclosure rather than immediate taxation.

The penalties for non-compliance are severe enough to warrant careful attention, but they're not inevitable—proper filing (even if late with reasonable cause) can protect you. When in doubt, consult a tax professional experienced in international taxation. The investment in proper compliance far outweighs the risk of substantial penalties and an open statute of limitations.

For the most current information and future tax years, always refer to IRS.gov/Form3520 for updated forms, instructions, and guidance.

‍