What IRS Form 3520 (2019) Is For
IRS Form 3520 (2019) is an annual return required for U.S. persons who engage in transactions with foreign trusts, receive distributions, or obtain certain foreign gifts or bequests from foreign persons. This form allows the IRS to monitor compliance with foreign trust reporting requirements and ensure proper disclosure of foreign financial assets. It also helps identify potential tax avoidance involving foreign trusts, partnerships, or corporations.
Each taxpayer must accurately report the gross reportable amount and attach all relevant documentation. Failure to comply with filing or reporting requirements may result in automatic penalties and penalty assessments, making accurate and timely submission essential for maintaining compliance with U.S. international tax laws. If your filing involves multiple IRS forms or foreign reporting documents, our IRS Form Help Center offers clear explanations of related forms and how they connect to foreign trust reporting.
When You’d Use IRS Form 3520 (2019)
Taxpayers typically use IRS Form 3520 (2019) when discovering unfiled foreign trust or gift transactions after the original due date or during a compliance review. Every day, filing situations include:
- Unreported transactions with foreign trusts: A taxpayer later realizes that a foreign grantor trust or foreign trust distribution was not reported on time.
- Receipt of certain foreign gifts or bequests: A U.S. person receives foreign gifts or bequests from foreign persons that exceed the IRS reporting threshold. Some large foreign gifts may also require reviewing the Form 709 federal gift tax return rules to determine whether additional disclosures are needed.
- IRS notices or penalty assessments: A taxpayer receives a notice or penalty assessment for failure to file and must submit the form to correct prior omissions.
- Late-filed forms discovered during compliance reviews: A taxpayer identifies missed reporting obligations while participating in streamlined procedures or voluntary disclosure programs. If you discover other missing tax returns for the same period, our guide to unfiled federal tax returns explains how to resolve multiple unfiled years and prevent additional IRS enforcement actions.
Key Rules or Details for the 2019 Tax Year
For the 2019 tax year, specific rules governed how taxpayers reported transactions with foreign trusts and the receipt of foreign gifts or bequests.
- Penalty amount structure: Penalties imposed for failing to file or report accurately exceed $10,000 or 35% of the gross reportable amount for transactions with foreign trusts or distributions received.
- Foreign gift thresholds: U.S. persons must report foreign gifts exceeding $100,000 from foreign estates or individuals and over $16,388 from foreign corporations or partnerships.
- Filing extensions: The due date was April 15, 2020, with an automatic extension to October 15, 2020, for those who extended their individual income tax returns.
- Separate filings: An individual form must be filed for each foreign trust to ensure accurate review and compliance with IRS reporting requirements.
Step-by-Step (High Level)
The following steps outline the proper procedure for completing and submitting IRS Form 3520 (2019) when filing late or making corrections.
- Gather tax transcripts and foreign asset information: Using Form 4506-T, obtain tax transcripts and review all foreign financial assets, bank accounts, and relevant supporting documentation.
- Complete the correct version of Form 3520: Fill out all applicable sections accurately, ensuring that each transaction with a foreign trust or receipt of a foreign gift is clearly reported.
- Attach all necessary owner statements: Include Form 3520-A or a reasonable cause statement if the foreign trust failed to file its required information.
- Mail the complete package to the IRS: Send the completed form and attachments to the IRS Service Center in Ogden, Utah, using certified mail, and retain copies for your records.
- Monitor for IRS correspondence: The IRS may issue notices or requests for clarification, particularly when additional documentation or penalty review is required.
Common Mistakes and How to Avoid Them
Many taxpayers make preventable errors when filing IRS Form 3520 (2019), leading to unnecessary penalties and delays in processing. Understanding these common mistakes helps ensure accurate reporting and compliance with IRS requirements.
- Incomplete valuation reporting: Always accurately calculate and report the gross reportable amount using the appropriate valuation method for all property transfers or distributions.
- Missing foreign trust owner statements: Attach all required Form 3520-A owner statements or substitute documentation to confirm the foreign trust’s compliance and ownership structure.
- Incorrect penalty calculations: Verify that penalty computations distinguish between initial and continuation penalties to avoid overpayment or underestimation of the penalty amount.
- Combining multiple trusts on one return: File Form 3520 for each foreign trust to ensure proper review and classification by the IRS.
- Weak reasonable cause documentation: Submit a detailed reasonable cause statement with supporting evidence showing the taxpayer’s reasonable efforts to comply.
- Failure to aggregate related foreign gifts: Combine such gifts from related foreign persons, corporations, or partnerships to determine whether the reporting threshold has been met.
Taxpayers who meet certain criteria may also qualify for relief through the IRS penalty abatement program, which includes reasonable cause and first-time abatement options.
What Happens After You File IRS Form 3520 (2019)
Once submitted, the IRS generally takes several months to process IRS Form 3520 (2019), depending on the complexity of the filing. Taxpayers will usually receive acknowledgment of receipt or a request for additional information if clarification is needed. If penalties were previously assessed, the IRS will review reasonable cause statements before issuing a determination.
Taxpayers can appeal penalty assessments, provide further documentation, or arrange to pay any remaining balance through an installment agreement. Maintaining organized records, copies of mailed forms, and correspondence helps ensure smooth resolution of any issues related to foreign trust reporting or receiving specific foreign gifts. If the IRS assesses a balance or penalty, learning how the IRS collection process works can help you understand next steps, timelines, and available taxpayer protections.
FAQs
What are foreign persons under IRS Form 3520 (2019)?
Foreign persons are individuals, estates, or entities that are not U.S. citizens or residents and are organized under the laws of a foreign country. Transactions or gifts from such persons must be reported on IRS Form 3520 to avoid such penalties for noncompliance.
How does the IRS define a foreign trust?
A foreign trust is a legal arrangement established under the laws of a foreign country in which a U.S. person is either a grantor, owner, or beneficiary. Failure to report distributions or ownership interests may result in additional penalties and compliance reviews.
Does Form 3520 apply to a controlled foreign corporation?
Form 3520 may apply when a controlled foreign corporation transfers assets or income to a U.S. person through a foreign trust. The responsible party must report such transactions to prevent further penalty assessments and ensure accurate disclosure.
Do foreign partnerships fall under Form 3520 reporting?
Certain transactions with foreign partnerships, such as transfers or gifts that meet reporting thresholds, must be disclosed on Form 3520. The responsible party must ensure the information is accurate to avoid such penalties.
Does Form 3520 affect my gross estate reporting?
While Form 3520 primarily addresses foreign trust and gift transactions, certain transfers from a foreign estate may affect the taxpayer’s gross estate. Accurate reporting prevents additional penalties and supports compliance with international tax obligations.
