What IRS Form 3520 (2013) Is For
IRS Form 3520 (2013) is used by U.S. persons to report transactions with foreign trusts and the receipt of foreign gifts under the Internal Revenue Code. The form helps the Internal Revenue Service track financial relationships involving foreign financial assets, foreign estates, and large transfers from foreign persons. Although filing does not automatically mean tax is owed, it ensures compliance with reporting requirements related to foreign trusts and other international transactions during the 2013 tax year.
Review how fiduciary income tax reporting works for estates and trusts using IRS Form 1041.
When You’d Use IRS Form 3520 (2013)
IRS Form 3520 (2013) must be filed when a U.S. person participates in or benefits from certain transactions with foreign trusts or receives substantial foreign gifts.
- Created or Transferred Property to a Foreign Trust: A U.S. person who transfers money, property, or other financial assets to a foreign trust must report the transaction according to the grantor trust rules under the Internal Revenue Code.
- Acted as a Foreign Trust Owner: Any individual or entity treated as the owner of a foreign trust for income tax purposes must file, even if there were no transactions during the tax year.
- Received Distributions from a Foreign Trust: A beneficiary who receives direct or indirect distributions, including the use of trust-owned property, must disclose these under the applicable reporting requirements.
- Received Certain Foreign Gifts or Bequests: U.S. citizens or residents must report foreign gifts exceeding IRS thresholds when received from nonresident alien individuals, foreign corporations, or foreign partnerships.
- Held Substantial Foreign Financial Interests: Those exercising primary supervision or substantial decisions over a foreign trust’s assets must report their financial interest to the Internal Revenue Service.
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 2013 Tax Year
The 2013 tax year established specific reporting thresholds and penalties that determine when IRS Form 3520 must be filed. Understanding these details is essential for maintaining compliance with the Internal Revenue Code and avoiding penalties.
- Threshold for Foreign Gifts: U.S. taxpayers must report if they receive over $100,000 from a foreign person or foreign estate, or more than $15,102 from a foreign corporation or partnership during the tax year.
- Aggregation of Related Gifts: Multiple gifts from related foreign persons must be combined to determine whether they exceed the reporting threshold set by the Internal Revenue Service.
- Mandatory Foreign Trust Reporting: All transactions with foreign trusts, including transfers and distributions, must be reported regardless of the dollar amount involved.
- Fair Market Value Requirement: Property transferred to or received from a foreign trust must be valued using its fair market value on the transaction date to ensure accurate reporting.
- Filing Deadline and Extensions: Form 3520 must be filed by the same due date as the income tax return; extensions granted for the return also apply to the form.
- Penalty Risks: The Internal Revenue Service may impose penalties, the greater of $10,000 or up to 35 percent of the gross value of the unreported transaction, for failure to file Form 3520 on time.
Use an IRS account transcript to confirm prior-year foreign trust transactions and reconcile reporting with Form 3520-A.
Step-by-Step (High Level)
Filing IRS Form 3520 (2013) requires accurate documentation and proper organization to meet the Internal Revenue Service’s foreign trust reporting standards.
- Identify Applicable Filing Category: Determine whether you are the creator, owner, or beneficiary of a foreign trust, or a recipient of foreign gifts or bequests.
- Collect Documentation: Gather trust agreements, financial account details, and property valuations to confirm the fair market value and gross value of any transfers.
- Complete Identification Information: Include your personal details, trust identification information, and check the correct box for initial, amended, or final return.
- Provide Transaction Details: Report all transactions with foreign trusts, including transfers, distributions, and principal and interest payments made under qualified obligations.
- Attach Required Annual Statements: Include trust beneficiary statements, documentation on foreign trust assets, or written explanations for missing documents if the foreign trust fails to provide them.
- Review and File Form 3520: Ensure that all sections are completed accurately, sign the form, and mail it to the Internal Revenue Service Center in Ogden, Utah. Retain copies for your records and future income tax purposes.
Request an IRS non-filing letter if any earlier foreign trust or foreign gift filings were missed.
Common Mistakes and How to Avoid Them
Each mistake below can result in penalties or delayed processing.
- Missing Filing Deadlines: Late filing can lead to significant penalties; always submit Form 3520 by your income tax return due date or within your approved extension period.
- Failing to Aggregate Related Gifts: Combine all gifts received from related foreign persons or entities to determine whether they exceed the reporting threshold for foreign gifts.
- Incomplete or Inaccurate Forms: Review every page and attachment before submission because the Internal Revenue Service treats incomplete forms as not filed.
- Ignoring Indirect Distributions: Using property owned by a foreign trust without paying fair market value qualifies as a reportable benefit and must be adequately disclosed.
- Consolidating Multiple Trusts on One Form: File a separate Form 3520 for each foreign trust to meet the filing requirements and prevent processing errors.
- Overlooking Reasonable Cause Defense: If filing late due to serious illness or other valid reasons, provide detailed documentation to support a reasonable cause claim.
- Poor Record Retention: Keep all trust-related documents, property valuations, and proof of transactions for a minimum of three years to demonstrate compliance in the event of an audit.
Understand the IRS collection process if penalties or assessments arise from foreign trust reporting.
What Happens After You File Form 3520
After you file IRS Form 3520 (2013), the Internal Revenue Service reviews the submission to verify accuracy and completeness. If your form is correct, you will generally receive no further correspondence. However, if discrepancies or missing information are found, the IRS may request additional documentation or clarification to verify the accuracy of the information.
The statute of limitations for assessment begins only after a complete form is filed; incomplete filings can leave a taxpayer subject to audit indefinitely. Maintain organized records and copies of all submissions to prove compliance with reporting obligations for future tax years.
FAQs
Do I owe tax when I file Form 3520?
Filing Form 3520 is an information requirement; it does not automatically create tax owed. However, certain transactions involving foreign trusts or large gifts may have tax implications under the Internal Revenue Code. U.S. taxpayers must evaluate their income tax purposes to determine whether distributions, property transfers, or other activities require reporting or additional tax payments.
What if the foreign trust refuses to provide information?
Even if the foreign trust does not cooperate, a U.S. owner must still file Form 3520 and include an explanation. If the trust fails to issue required annual statements, disclose its foreign trust’s assets treated as distributed, or identify substantial decisions, the filer should report as accurately as possible.
How do I determine the fair market value for reporting purposes?
When a U.S. person transfers property or receives assets from a foreign trust, the valuation must reflect fair market value on the transaction date. Use comparable marketable securities or similar property benchmarks to ensure accurate reporting.
Can privacy laws abroad exempt me from filing a report?
No, foreign privacy restrictions do not override U.S. filing requirements or Treasury regulations. Every U.S. citizen is required to comply with foreign trust reporting and disclose financial accounts or foreign bank relationships as applicable.
