Form 3520 (2021) Filing Checklist
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
Purpose
Form 3520 reports transactions with foreign trusts and receipt of large foreign gifts or bequests during the 2021 tax year. U.S. persons must file this form to report transfers to foreign trusts, ownership interests in foreign trusts, distributions received from foreign trusts, and qualifying foreign gifts exceeding statutory thresholds. The form ensures compliance with federal reporting requirements under sections 6048 and 6039F of the Internal Revenue Code.
Filing Requirements
You must file Form 3520 for tax year 2021 if any of the following apply:
- Transfers to Foreign Trusts: You transferred money or property to a foreign trust during 2021, either directly or indirectly, including transfers by reason of death.
- Trust Ownership: You are treated as a U.S. owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679).
- Trust Distributions: You received distributions from a foreign trust during 2021, including loans of cash or marketable securities, or you used trust property without paying fair market value.
- Foreign Gifts: You received aggregate gifts or bequests exceeding $100,000 from nonresident alien individuals or foreign estates, or exceeding $16,815 from foreign corporations or foreign partnerships.
Step-by-Step Filing Instructions
Step 1: Determine Your Filing Category
Identify which reporting obligations apply to your situation. You may need to complete multiple parts of Form 3520 if you have different types of relationships with foreign trusts or received qualifying foreign gifts. Each foreign trust requires a separate Form 3520.
Step 2: Complete the Identifying Information Section
Enter your name, address, and taxpayer identification number in the header section. Indicate the tax year being reported—use calendar year 2021 or your fiscal year beginning in 2021. If filing jointly with your spouse for the same foreign trust, check the joint filing box. All information must be provided in English, and all amounts must be reported in U.S. dollars.
Step 3: Answer the U.S. Agent Question
Determine whether the foreign trust appointed a U.S. agent who can provide the IRS with all relevant trust information. If yes, complete lines 3a through 3g with the agent’s information. If no, you must complete additional beneficiary and trustee information in lines 15 through 18 and attach the required trust documents. The U.S. agent must have a binding contract with the trust authorizing them to act on behalf of the trust for IRS examination purposes.
Step 4: Report Part I Transfers (If Applicable)
Complete Part I (lines 5 through 19) if you transferred property to a foreign trust during 2021. Provide the trust creator’s information on lines 5a through 5c and the trust’s country code on lines 6a and 6b. Answer whether you are a U.S. owner of the trust on line 7. Complete Schedule A if you transferred property in exchange for an obligation from the trust or a related person. Schedule B reports gratuitous transfers where you received less than fair market value or no consideration.
Step 5: Identify Qualified vs. Nonqualified Obligations
If you transferred property in exchange for an obligation, determine whether it qualifies as a “qualified obligation.” To qualify, the obligation must be in writing, have a term not exceeding five years, be denominated in U.S. dollars, have a yield between 100% and 130% of the applicable federal rate, and you must agree to extend the statute of limitations. Report qualified obligations on line 11b and attach loan documents. If previously attached within the last three years, you only need to provide relevant updates.
Step 6: Complete Schedule B for Gratuitous Transfers
Use Schedule B (line 13) to report transfers where you received less than fair market value or no consideration, completing columns (a) through (i) as applicable. Nonqualified obligations must show zero in column (h). Attach sale or loan documents on line 14, or indicate “Attached Previously” with the year if documents were submitted within the past three years.
Step 7: Report Part II Ownership (If Applicable)
Complete Part II (lines 20 through 23) if you are treated as a U.S. owner of any portion of a foreign trust under the grantor trust rules. If the foreign trust did not file Form 3520-A by its due date, you must complete a substitute Form 3520-A to the best of your ability and attach it to your Form 3520. Report the gross value of your ownership portion on line 23. Failure to complete the substitute Form 3520-A may result in penalties equal to 5% of the gross value of the trust assets you are treated as owning.
Step 8: Report Part III Distributions (If Applicable)
Complete Part III (lines 24 through 53) if you received distributions from a foreign trust during 2021. Report all cash and property received on line 24, excluding loans that were repaid at market interest rates. Include constructive transfers such as credit card charges paid by the trust or checks written on trust accounts. If you received a loan or used trust property, report these on lines 25 through 28.
Step 9: Calculate Ordinary Income vs. Accumulation Distributions
Determine whether distributions qualify as ordinary income or accumulation distributions using lines 31 through 37. Ordinary income is the smaller of the current year's distribution or 125% of the average distributions from the prior three years. If the distribution exceeds this threshold, the excess is considered an accumulation distribution, subject to special tax treatment, and may require the completion of Form 4970. The calculation uses the same formulas and thresholds as prior years, with no 2021-specific changes.
Step 10: Complete Part IV for Foreign Gifts (If Applicable)
Complete Part IV (lines 54 through 56) if you received qualifying foreign gifts or bequests during 2021. On line 54, report aggregate gifts exceeding $100,000 from nonresident alien individuals or foreign estates, separately identifying each gift over $5,000 in columns (a) through (c). On line 55, report aggregate gifts exceeding $16,815 from foreign corporations or foreign partnerships. On line 56, disclose whether any donor or intermediary acted as a nominee on your behalf.
Step 11: Verify Required Attachments
Ensure all required documents are attached before filing. This includes trust documents if no U.S. agent was appointed, substitute Form 3520-A if the foreign trust failed to file, loan and sale documents for qualified obligations, and authorization agreements for U.S. agents. Trust documents, loan documents, and sale documents attached to Form 3520 or Form 3520-A filed within the previous three years require only relevant updates, not complete resubmission.
Step 12: Review Penalties and Reasonable Cause
Understand the penalty structure for noncompliance. Penalties include 35% of gross reportable amounts for failure to report transfers, 5% of trust assets for ownership reporting failures, and 35% of distributions for failure to report receipts. For foreign gifts under Section 6039F, penalties equal 5% per month, up to a maximum of 25%. No penalties apply if you can demonstrate reasonable cause and absence of willful neglect. Note that foreign country penalties or trust provisions preventing disclosure do not constitute reasonable cause.
Step 13: Sign and Date the Form
The appropriate person must sign Form 3520 based on the filer type. Individuals and fiduciaries sign personally. Partnerships require the signature of a general partner or an LLC member. Corporations require a signature by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or other authorized corporate officer. Paid preparers must complete the preparer information section and provide a copy to the filer.
Step 14: File by the Applicable Due Date
Form 3520 is generally due by the 15th day of the fourth month following the end of your tax year (April 15 for calendar-year filers). U.S. citizens or residents living and working outside the United States and Puerto Rico, or serving in the military outside the United States and Puerto Rico, have until the 15th day of the 6th month (June 15). If you receive an extension for your income tax return, Form 3520 is due by the 15th day of the 10th month (October 15) of the year following the tax year to which the extension applies.
Step 15: Send to the Correct Address
Mail your completed Form 3520 with all required attachments to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. The form must include all the necessary attachments to be considered complete. Incomplete forms may result in penalties and extend the statute of limitations for assessment of related taxes.
Important 2021-Specific Notes
Substitute Form 3520-A Requirement: If the foreign trust failed to file Form 3520-A for tax year 2021, you must complete a substitute Form 3520-A to the best of your ability and attach it to your Form 3520. This requirement applies to U.S. owners and is critical to avoid the 5% penalty.
Three-Year Document Rule: Trust documents, loan documents, and sale documents attached to Form 3520 or Form 3520-A filed within the previous three years require only relevant updates rather than complete resubmission.
Qualified Obligation Agreements: Qualified obligations require explicit agreement to extend the statute of limitations three years beyond the maturity date. You have the right to refuse or limit this extension; however, doing so renders the obligation non-qualified for reporting purposes.
Foreign Corporation/Partnership Threshold: The inflation-adjusted threshold for reporting gifts from foreign corporations or foreign partnerships in 2021 is $16,815 as specified in Revenue Procedure 2020-45.
No COVID-19 Relief Provisions: Form 3520 for tax year 2021 does not incorporate COVID-19 relief provisions, economic impact payment reconciliation, or American Rescue Plan Act expansions. These provisions appear only on Form 1040 and related schedules, not on Form 3520.
Additional Compliance Considerations
You may also need to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) or Form 8938 (Statement of Specified Foreign Financial Assets). The requirements depend on the specific holdings in your foreign financial accounts and the specified foreign financial assets you possess. These are separate reporting requirements with different thresholds and due dates.
Your tax return must be consistent with the Form 3520-A filed by the foreign trust. If you treat items differently on your tax return than the trust reports, file Form 8082 (Notice of Inconsistent Treatment or Administrative Adjustment Request) to disclose the inconsistency.
Keep contemporaneous records supporting your good-faith estimates of property values, as formal appraisals are not generally required, but supporting documentation is essential if the IRS examines your return.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
