Form 3520 Checklist: 2013 Tax Year
Form 3520 serves as the Annual Return to Report Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts for the 2013 tax year. U.S. persons who received distributions from foreign trusts, transferred property to foreign trusts, or received large foreign gifts during
2013 must file this form. The 2013 instructions clarified reporting thresholds for foreign gifts and specified penalty provisions under the HIRE Act framework for reportable transactions. All filers must include complete foreign entity identification and meet strict filing deadlines.
Who Must File Form 3520
You must file IRS Form 3520 if you are a U.S. citizen, resident alien, or domestic entity that engaged in specific transactions with foreign trusts during 2013. The filing requirement applies if you received distributions from a foreign trust, transferred property to a foreign trust, or are treated as the owner of a foreign trust under sections 671 through 679 of the Internal Revenue
Code.
Nonresident aliens generally do not file IRS Form 3520 unless they engaged in a reportable transaction with a foreign trust. Verify your U.S. person status before proceeding with the filing process.
Reporting Foreign Gifts and Thresholds
U.S. persons must report foreign gifts exceeding specific thresholds on IRS Form 3520. The
2013 instructions specify that you must report gifts totaling more than $100,000 from any one foreign individual or foreign estate during the calendar year.
To calculate the $100,000 threshold, you must aggregate gifts from different foreign nonresident aliens and foreign estates if you know, or have reason to know, that such persons are related to each other. Gifts exceeding $15,102 from foreign corporations or foreign partnerships also require reporting, including gifts from any foreign person related to such entities.
Specifically for 2013, the threshold of $15,102 for gifts from foreign corporations or foreign partnerships is adjusted annually for inflation. When reporting foreign gifts, include the donor’s name, address, country of origin, and relationship to you.
Foreign Trust Distribution Reporting
Distributions from foreign trusts require detailed reporting on Part III of IRS Form 3520. The
2013 instructions define distributions to include all amounts paid or credited to you by the trust, whether in cash or property.
Property distributions are measured at a fair market value on the distribution date, not on a cost basis. You must attach a separate statement for each foreign trust from which you received a distribution during 2013.
Each distribution statement must include the total distribution amount received, the date the distribution was received, and the form of distribution, such as cash, property, or other assets. In addition, the statement must specify the country of origin for the trust and indicate whether the amounts represent income or principal.
Transfers to Foreign Trusts
Transferors must report all property transfers to foreign trusts during 2013 on Part I of Form
3520. Report the transfer date, complete property description, and fair market value on the date of transfer.
The 2013 instructions specify that gratuitous transfers trigger reporting obligations even when you received no consideration in return. Include whether the transfer occurred by gift, bequest, or another mechanism, and identify the foreign trust recipient by providing the trust’s name, country of residence, and complete address.
Foreign Trust Ownership Reporting
U.S. persons who are treated as owners of a foreign grantor trust under sections 671 through
679 must report ownership on Part II of Form 3520. This reporting obligation exists even when no transactions involving the trust occurred during the tax year.
Beneficiaries who receive distributions from a nongrantor trust must report those distributions on
Part III. These represent separate reporting obligations that may apply to different individuals.
Understanding Foreign Trust Classifications
Foreign trusts are classified as either grantor trusts or nongrantor trusts for United States income tax purposes. A foreign grantor trust exists when the trust assets are treated as owned by a person other than the trust under the grantor trust rules.
As a distinct taxable entity, a nongrantor trust does not attribute its assets to any individual owner. The classification affects both the reporting requirements on Form 3520-A and the income tax treatment for beneficiaries receiving distributions.
Filing Procedures and Deadlines
Form 3520 is filed separately from your income tax return and must be sent to the Internal
Revenue Service Center at P.O. Box 409101, Ogden, UT 84409. The form is due on the same date as your income tax return, including any extensions granted for filing your U.S. tax return.
Do not attach Form 3520 to your Form 1040 or other income tax return. Filing separately ensures proper processing and maintains compliance with IRS procedures for foreign trust and foreign gift reporting.
Required attachments include
- Foreign trust identification statements must be included to show each trust’s complete
legal name and full address.
- Distribution schedules are required to detail all amounts received from foreign trusts
during the calendar year, regardless of whether the distributions were made in cash, property, or other assets.
- Property transfer valuation statements must document the fair market value of all assets
transferred to foreign trusts as of the date of transfer.
- Copies of trust agreements and related correspondence must be retained and made
available for IRS inspection upon request, even though these documents are not submitted with the Form 3520 filing.
Sign and date the form in the designated area before mailing. Filing without all required schedules may result in the IRS treating your return as incomplete, which can trigger penalties and extend the statute of limitations for United States tax assessment purposes.
Foreign Trust Identification Requirements
Provide complete identification information for each foreign trust on Form 3520. Enter the trust’s name exactly as it appears on all official trust documents and records to ensure accurate processing.
Include the trust’s country of residence, principal place of business, and country of tax residence on the appropriate lines. The 2013 form added a specific line requesting the trust’s country of tax residence, distinguishing this designation from the trust’s country of residence and principal place of business.
Provide an Employer Identification Number if the IRS has assigned one to the trust. When no
EIN exists, state “None” and provide the trust’s foreign tax identification number if available to assist with proper identification.
Form 3520-A and Trust Reporting Obligations
Foreign trusts with United States owners or beneficiaries must file Form 3520-A annually to report trust activities and provide required statements to U.S. persons. The foreign trust must provide each U.S. owner with a Foreign Grantor Trust Owner Statement using pages three and four of Form 3520-A.
Beneficiaries of foreign trusts should receive a Foreign Grantor Trust Beneficiary Statement or a
Foreign Nongrantor Trust Beneficiary Statement, depending on the trust classification. Each
U.S. owner must attach the owner statement from Form 3520-A to their Form 3520 when filing.
Failure by the foreign trust to file Form 3520-A triggers additional penalties for the U.S. owner equal to five percent of the gross reportable amount. It is also necessary for the trust to designate a United States agent who is authorized to accept service of process and respond to
IRS requests for records.
Penalties for Late or Incomplete Filing
Under sections 6677 and 6039F of the Internal Revenue Code, the penalty structure for Form
3520 filing failures imposes harsh monetary penalties. For filings due after December 31, 2009, section 6677 imposes an initial penalty equal to the greater of $10,000 or a percentage of the gross reportable amount.
The percentage equals 35% for Parts I and III, covering transfers to and distributions from foreign trusts, while Part II ownership reporting failures trigger a 5% penalty. Section 6039F imposes separate penalties specifically for unreported foreign gifts at a rate of 5% of the gift amount for each month the failure continues, not to exceed a total of 25%.
Additional penalties apply if noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. Penalties may be waived if you demonstrate that the failure resulted from reasonable cause and not willful neglect, but the burden of proof rests with the taxpayer to establish reasonable cause for United States income tax compliance purposes.
Record Retention and Documentation
Maintain comprehensive written records documenting your contact with each foreign trust and the basis for your reporting obligation. Keep copies of trust agreements, distribution statements, and all correspondence with the trust for at least six years from the filing date.
The 2013 instructions do not require submission of these documents with your return, but specify they must remain available for IRS inspection upon request. Proper documentation protects you during audits and helps demonstrate compliance with foreign trust reporting requirements under section 6048.
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