A Layman's Guide to Understanding and Filing

What Form 3520-A Is For

Form 3520-A is the IRS's way of keeping track of foreign trusts that have U.S. owners. Think of it as a detailed annual report card that a foreign trust must file to tell the IRS about its income, assets, and distributions when Americans are involved as owners.

Here's the key concept: When you're a U.S. citizen or resident who is treated as the "owner" of a foreign trust under special tax rules (called "grantor trust rules" in sections 671-679 of the tax code), the IRS wants to know what that trust is doing. The foreign trust itself is responsible for filing this form, but you as the U.S. owner are responsible for making sure it gets filed. If the foreign trust doesn't file it, you'll need to prepare a "substitute" version yourself and attach it to your own Form 3520.

The form reports three main things: (1) the trust's income and expenses for the year, (2) a balance sheet showing the trust's assets and liabilities, and (3) detailed statements for each U.S. owner and U.S. beneficiary who received distributions. This information helps the IRS ensure that U.S. owners are properly reporting their share of the trust's income on their personal tax returns.

When You’d Use Form 3520-A (Including Late and Amended Returns)

Regular Filing

Form 3520-A must be filed every year by the 15th day of the 3rd month after the end of the trust's tax year. For a calendar-year trust, that means March 15. You can get an automatic 6-month extension by filing Form 7004 before that deadline, giving you until September 15.

Late Filing

If you miss the deadline and haven't filed an extension, you're filing late. The penalties are severe (see below), but you should still file as soon as possible. Late is better than never—the penalties grow worse the longer you wait, and after 90 days past an IRS notice, they increase substantially.

Amended Returns

If you discover errors after filing—such as incorrect income figures, missing beneficiary information, or wrong calculations—you should file an amended Form 3520-A. Check the "Amended return" box at the top of the form and provide corrected information. Amended returns are important because incorrect information triggers the same penalties as not filing at all.

Substitute Form 3520-A

This is a special situation. If the foreign trust refuses or fails to file Form 3520-A, you as the U.S. owner must file a substitute version yourself. You complete the form "to the best of your ability" using whatever information you have about the trust, attach it to your own Form 3520 (due with your personal tax return by April 15 for individuals, or October 15 with extensions), and sign it as the U.S. owner. This protects you from penalties for the trust's failure to file.

Key Rules for 2014

Several critical rules governed Form 3520-A filing in 2014:

1. U.S. Owner Responsibility: Even though the foreign trust is supposed to file, U.S. owners are personally responsible for ensuring Form 3520-A gets filed. If it doesn't, you face penalties equal to the greater of $10,000 or 5% of the trust assets you're treated as owning.
2. Annual Statements Required: The foreign trust must provide each U.S. owner with a "Foreign Grantor Trust Owner Statement" (pages 3-4 of the form) and each U.S. beneficiary who received a distribution with a "Foreign Grantor Trust Beneficiary Statement" (page 5) by March 15 (or later if extended). These statements tell you what income to report on your personal tax return.
3. U.S. Agent Requirement: To make filing easier, the foreign trust can appoint a U.S. agent—an authorized person in the United States who can provide records to the IRS. If no agent is appointed, the trust must attach extensive documentation including the trust agreement, organizational chart, and all amendments.
4. All Dollar Amounts in U.S. Dollars: Everything must be reported in U.S. dollars and in English, even if the trust operates in another currency or country.
5. Employer Identification Number (EIN) Required: The foreign trust needs a U.S. EIN. Don't use your personal Social Security Number to identify the trust—it must have its own EIN.
6. Consistency Rule: The amounts you report on your personal tax return must match what's on Form 3520-A. If they don't match, you must file Form 8082 to explain the inconsistency to the IRS.

Step-by-Step (High Level)

Here's how to approach Form 3520-A filing for 2014:

Step 1: Determine If Filing Is Required

Confirm that the foreign trust has at least one U.S. owner under the grantor trust rules (sections 671-679). If you're treated as owning any portion of a foreign trust—meaning you're taxed on its income—Form 3520-A is required.

Step 2: Obtain or Confirm the Trust's EIN

The foreign trust needs a U.S. Employer Identification Number. If it doesn't have one, apply at IRS.gov/EIN or call 267-941-1099.

Step 3: Decide on U.S. Agent or Document Attachment

The trust should consider appointing a U.S. agent (a U.S. person authorized to provide records to the IRS). If no agent is appointed, you'll need to attach comprehensive trust documents—the trust instrument, memoranda, letters of wishes, organizational charts, and ownership structure documents.

Step 4: Complete Part I (General Information)

Fill in the trust's name, EIN, address, trustee information, and whether a U.S. agent was appointed. If a U.S. agent exists, provide their name and contact information.

Step 5: Complete Part II (Income Statement)

Report all the trust's income and expenses for the year using U.S. tax principles. This includes interest, dividends, capital gains, rental income, and expenses like trustee fees, interest expense, and foreign taxes. The net income figure is critical because it determines what U.S. owners must report on their personal returns.

Step 6: Complete Part III (Balance Sheet)

List all trust assets and liabilities at fair market value at both the beginning and end of the tax year. Include cash, securities, real estate, receivables, and accumulated income.

Step 7: Prepare Foreign Grantor Trust Owner Statements

For each U.S. owner, prepare a separate owner statement (pages 3-4) showing their share of trust income, expenses, and the gross value of the trust portion they're treated as owning. These statements must be furnished to each U.S. owner by March 15 (or later with extension).

Step 8: Prepare Foreign Grantor Trust Beneficiary Statements

For each U.S. beneficiary who received a distribution during the year, prepare a separate beneficiary statement (page 5) describing the distribution amount, date, and fair market value. Furnish these to beneficiaries by March 15.

Step 9: File and Distribute

Mail the complete Form 3520-A (with all statements and attachments) to: Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, by March 15, 2015 (or September 15, 2015 if extended). Also provide copies of the owner and beneficiary statements to each relevant person.

Common Mistakes and How to Avoid Them

Mistake #1: Using Your SSN Instead of the Trust's EIN

Many people mistakenly use their personal Social Security Number when identifying the trust. Solution: Always obtain a separate EIN for the foreign trust and use only that number on line 1b of Form 3520-A.

Mistake #2: Missing the Deadline or Not Filing for Extension

The March 15 deadline catches many people off guard. Solution: Mark your calendar for early February to start gathering information. If you need more time, file Form 7004 by March 15 to get an automatic 6-month extension to September 15.

Mistake #3: Incomplete Documentation When No U.S. Agent Appointed

If the trust doesn't appoint a U.S. agent, you must attach extensive trust documents—and many filers forget this or provide incomplete documentation. Solution: Review the document checklist carefully. Include the trust instrument, all amendments, any memoranda or letters of wishes, and an ownership chart. If these were attached in a prior year (within the last 3 years), note that and attach only updates.

Mistake #4: Not Providing Statements to U.S. Owners and Beneficiaries

The form isn't complete until you've furnished the required statements to all U.S. owners and beneficiaries. Solution: Create a distribution list of everyone who needs a statement, prepare their individual statements, and send them by the deadline. Keep proof of mailing.

Mistake #5: Reporting in Foreign Currency

All amounts must be in U.S. dollars, but many people report in the trust's local currency. Solution: Convert all amounts to U.S. dollars using appropriate exchange rates for the dates of transactions.

Mistake #6: Assuming the Trust Will Handle Everything

U.S. owners often assume the foreign trustee will file Form 3520-A automatically. In reality, many foreign trustees don't understand U.S. reporting requirements. Solution: Proactively communicate with the trustee well before the deadline. If they won't file, prepare a substitute Form 3520-A yourself.

Mistake #7: Inconsistent Reporting Between Forms

What you report on your personal Form 3520 and tax return must match Form 3520-A. Solution: Carefully reconcile all numbers. If there are legitimate differences, file Form 8082 to explain them to the IRS.

What Happens After You File

Immediate Processing

Once the IRS receives Form 3520-A, it enters their system and is matched against the Form 3520 filed by the U.S. owner. The IRS checks that the information is consistent and complete.

U.S. Owner Tax Return Implications

The information on the Foreign Grantor Trust Owner Statement directly affects your personal income tax return. You must report your share of the trust's income on the appropriate schedules of your Form 1040, even if you didn't actually receive any distributions. This is because as a U.S. owner of a grantor trust, you're taxed on the trust's income whether or not it's distributed to you.

Extended Assessment Period

If you don't file Form 3520-A (or file it incomplete), the IRS's normal 3-year statute of limitations doesn't apply. The IRS can assess additional taxes related to the trust indefinitely until you file complete and accurate information—and then they have 3 years from that date.

Potential IRS Inquiries

The IRS may send follow-up letters requesting additional information or clarification, especially if: (1) the form appears incomplete, (2) numbers don't reconcile with the U.S. owner's Form 3520, (3) the fair market values seem unrealistic, or (4) required documents weren't attached.

Records Examination

If the trust appointed a U.S. agent, the IRS may contact that agent to examine records. If no agent was appointed, the IRS might request documents directly from the U.S. owner or attempt to get information from the foreign trust directly.

Penalty Assessment

If the IRS determines the filing was late, incomplete, or incorrect, they'll send a penalty notice. These notices typically arrive 6-12 months after filing. You'll have an opportunity to respond and claim "reasonable cause" to abate penalties if you have a valid excuse. However, note that simply being unable to get information from the foreign trustee is not considered reasonable cause.

Amended Return Processing

If you file an amended Form 3520-A, the IRS will review it and adjust their records. This may trigger adjustments to your personal tax return if income figures changed.

FAQs

Q1: What's the difference between Form 3520 and Form 3520-A?

Form 3520 is filed by the U.S. person to report transactions with foreign trusts, ownership of foreign trusts, and receipt of large foreign gifts. Form 3520-A is filed by the foreign trust itself (or by the U.S. owner as a substitute) to provide detailed information about the trust's income, assets, and distributions. Think of Form 3520 as your personal report about your dealings with the trust, while Form 3520-A is the trust's own annual report. Most U.S. owners will need to file both forms.

Q2: What are the penalties for not filing Form 3520-A?

The penalty is the greater of $10,000 or 5% of the gross value of the portion of the trust you're treated as owning at the end of the tax year. For example, if you're treated as owning a trust worth $500,000 and it doesn't file Form 3520-A, you'd face a penalty of $25,000 (5% of $500,000). After the IRS mails you a notice and 90 days pass without compliance, additional penalties accrue. These penalties can be avoided only if you demonstrate "reasonable cause" for the failure—a high bar to meet.

Q3: How do I get an EIN for a foreign trust?

You can apply online at IRS.gov/EIN, but foreign entities may need to call the IRS directly at 267-941-1099 (this is a toll call, not toll-free). The process typically takes 10-15 minutes by phone. You'll need basic information about the trust including its name, address, and the responsible party's information. Don't use your personal SSN in place of an EIN—the trust must have its own identification number.

Q4: What if the foreign trustee refuses to file Form 3520-A or won't give me information?

This is a common problem. If the foreign trustee won't cooperate, you must file a substitute Form 3520-A yourself. Complete it "to the best of your ability" using whatever information you have, check the "Substitute Form 3520-A" box, sign it as the U.S. owner, and attach it to your Form 3520 by the Form 3520 deadline (typically April 15 for individuals, or October 15 with extension). While you won't have perfect information, filing a good-faith substitute protects you from penalties. Note: The inability to get information from the foreign trustee is not considered reasonable cause to avoid penalties entirely, which is why the substitute filing is so important.

Q5: I own only a small percentage of the foreign trust. Do I still need to file?

Yes. Even if you're treated as owning just a small portion of the trust under the grantor trust rules, Form 3520-A must be filed for the entire trust, and you must report your proportionate share of the trust's income on your personal tax return. The size of your ownership doesn't eliminate the filing requirement—it only affects the amount of income you must report and the potential penalty calculation.

Q6: Are there any exceptions to filing Form 3520-A?

Yes, but they're limited. The most common exceptions for 2014 are: (1) Canadian RRSPs and RRIFs (registered retirement savings plans and retirement income funds) are exempt under Revenue Procedure 2014-55, and (2) certain other tax-favored foreign retirement trusts may qualify for an exemption. However, these exceptions don't eliminate your obligation to file FinCEN Form 114 (FBAR) if you have signature authority over foreign accounts exceeding $10,000. Most other foreign trusts with U.S. owners do require Form 3520-A.

Q7: Can I file Form 3520-A electronically?

No. For 2014, Form 3520-A must be filed on paper and mailed to the IRS address in Ogden, Utah. Electronic filing is not available for this form. Use certified mail with return receipt requested so you have proof of filing.

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