What Form 3520 Is For

Form 3520 is an information reporting form—not a tax return—used by U.S. persons to notify the Internal Revenue Service about specific financial relationships with foreign trusts and large gifts or bequests from foreign sources. Think of it as a disclosure document that helps the IRS track money flowing between U.S. taxpayers and foreign entities.

The form serves four primary purposes. First, it reports any transfers you made to a foreign trust, whether you created a new trust or added money or property to an existing one. Second, if you're treated as the owner of a foreign trust under U.S. tax laws (meaning you control it or benefit from it), you must report that ownership annually—even if nothing changed during the year. Third, if you received distributions from a foreign trust, those must be disclosed. Finally, Part IV captures substantial gifts: more than $100,000 from a foreign individual or estate, or more than $14,375 from a foreign corporation or partnership (the 2011 threshold).

Critically, Form 3520 is informational only. Filing it doesn't automatically mean you owe taxes. However, the information reported may affect your income tax return. For example, certain foreign trust distributions could be taxable, and transfers to foreign trusts might trigger gain recognition under Section 684. You must file a separate Form 3520 for each foreign trust you deal with.

Source: IRS Form 3520 Instructions 2011

When You’d Use Form 3520 (Late/Amended Filings)

Standard Filing Deadline

Form 3520 is due on the same date as your income tax return, including extensions. For most individual taxpayers filing for calendar year 2011, this meant April 15, 2012, or October 15, 2012 with an extension. If you're an executor filing on behalf of a deceased U.S. citizen or resident, the form follows the Form 706 (estate tax return) deadline instead.

Late Filing

Missing the deadline doesn't mean you shouldn't file—quite the opposite. If you realize you should have filed Form 3520 but didn't, file it as soon as possible. While penalties may apply, demonstrating "reasonable cause" (legitimate reasons beyond your control, like relying on incorrect professional advice or being unaware of the requirement due to complex circumstances) can potentially reduce or eliminate them. The IRS emphasizes that simply claiming ignorance of the law or foreign country restrictions on disclosure generally doesn't qualify as reasonable cause.

Amended Returns

Check the "Amended return" box at the top of the form if you're correcting a previously filed Form 3520. This might be necessary if you discover errors in reported values, omitted transactions, or received corrected Foreign Grantor Trust Owner Statements or Foreign Nongrantor Trust Beneficiary Statements from the trust. Include a detailed explanation of what changed and why.

Initial and Final Returns

Mark "Initial return" if this is your first time reporting on a particular foreign trust. Check "Final return" if no further reporting will be required—for instance, if you were the trust owner and it terminated during 2011, or if you permanently severed all connections to the trust.

Where and How to File (2011)

The form must be mailed to: Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409. Electronic filing was not available for Form 3520 in 2011.

Source: IRS Form 3520 Instructions 2011

Key Rules for 2011

Filing Thresholds

You must file if you (1) transferred money or property to a foreign trust; (2) are treated as owning any part of a foreign trust under Sections 671-679; (3) received any distribution from a foreign trust; or (4) received gifts exceeding $100,000 from foreign individuals/estates or $14,375 from foreign corporations/partnerships in 2011. Note that related donors are aggregated—if three related foreign individuals each gave you $40,000, that totals $120,000 and triggers reporting.

What Counts as a "Foreign Trust"

Any trust that isn't a "domestic trust" is foreign. A domestic trust must meet two tests: a U.S. court must be able to exercise primary supervision over administration, AND one or more U.S. persons must control all substantial decisions. If either test fails, it's a foreign trust—regardless of where it was created or who the beneficiaries are.

The Section 684 Trap

When you transfer appreciated property to a foreign nongrantor trust after August 4, 1997, you must recognize the gain immediately as if you sold it. This applies even if you don't actually receive anything back. While you report the gain on your income tax return (not Form 3520 itself), the transfer must still be disclosed on Form 3520's Part I.

U.S. Beneficiary Presumption

A foreign trust is generally presumed to have U.S. beneficiaries unless its terms explicitly prohibit any distribution to U.S. persons—even after the grantor's death or trust termination—and the trust can't be amended to permit such distributions. Discretionary language like "the trustee may distribute to anyone" typically means U.S. beneficiaries exist.

Qualified Obligations

If you transfer property to a foreign trust in exchange for a promissory note or other obligation, it's treated as a gratuitous (gift-like) transfer with zero value unless the obligation meets strict "qualified obligation" requirements: written agreement, maximum 5-year term, U.S. dollar denominated, interest rate between 100-130% of the applicable federal rate, agreement to extend the tax assessment period, and annual status reporting. Missing any element means the full transfer is reportable as a gift to the trust.

Documentation Requirements

If the foreign trust doesn't have a U.S. agent (a designated person in the U.S. who can provide trust records to the IRS), you must attach comprehensive trust documents including the trust instrument, all amendments, financial statements reflecting U.S. tax principles, summaries of oral understandings, and memoranda of wishes.

Source: IRS Form 3520 Instructions 2011

Step-by-Step (High Level)

Step 1: Determine Which Parts to Complete

Review the checkbox section on page 1. Check all that apply to your situation. Most filers complete one or two parts, not all four. Part I covers transfers to foreign trusts, Part II covers trust ownership, Part III addresses distributions received, and Part IV reports large foreign gifts.

Step 2: Gather Identifying Information

Complete lines 1-4 on page 1 with your personal information, the foreign trust's details (name, EIN if available, foreign address with country spelled out), and whether a U.S. agent exists. If there's no U.S. agent, you'll need to attach extensive trust documentation later.

Step 3: Complete Applicable Parts

Part I (Transfers): Detail each transfer with dates, property descriptions, fair market values, adjusted basis, and gain recognized. Schedule A tracks qualified obligations. Schedule B captures gratuitous transfers and requires beneficiary and trustee information if no U.S. agent exists. Schedule C reports on previously-reported qualified obligations still outstanding.
Part II (Ownership): Identify yourself as owner, provide trust creation details, confirm whether the trust filed Form 3520-A, and attach the Foreign Grantor Trust Owner Statement if received. If not received, you must prepare a substitute Form 3520-A—a complex undertaking.
Part III (Distributions): Report all amounts received in the year, including cash, property, and constructive distributions (like loan proceeds that aren't qualified obligations). Determine whether you received Foreign Grantor Trust or Foreign Nongrantor Trust Beneficiary Statements. If yes, attach them. If no, complete Schedule A using the "default method" to calculate accumulation distributions, or Schedule B if you have actual trust accounting information. Schedule C calculates interest charges on accumulation distributions using Form 4970.
Part IV (Gifts): List each gift over $5,000 if aggregate gifts exceeded the thresholds. Include dates, descriptions, values, and donor information.

Step 4: Attach Required Documents

Include trust instruments, financial statements, beneficiary statements, Form 8082 if reporting inconsistent treatment, and Form 4970 if calculating accumulation distribution tax.

Step 5: Sign and Mail

Sign under penalties of perjury. If using a paid preparer, they must also sign. Mail to the Ogden Service Center address. Keep copies of everything for your records.

Source: IRS Form 3520, 2011

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Because Gifts Aren't Taxable

Foreign gifts generally aren't subject to U.S. income tax, which causes confusion. Many people assume "no tax = no reporting." Wrong. Form 3520 is an information return required regardless of tax consequences. The penalty for not filing can be severe—5% of the gift amount per month, up to 25%.

Mistake #2: Missing Related Donor Aggregation

If you receive $60,000 from your foreign aunt and $50,000 from her sister (your other aunt), that's $110,000 total from related donors, triggering the reporting requirement. The $100,000 threshold applies to aggregate amounts from related parties, not individual gifts. Review Section 267 and 707(b) to understand who counts as "related."

Mistake #3: Incomplete Distributions Reporting

"Distribution" is broader than you think. It includes obvious things like cash payments, but also constructive distributions: using a credit card paid by the trust, writing checks on the trust's bank account, living in trust-owned property rent-free, or receiving loans that aren't qualified obligations. Forgetting these items understates distributions.

Mistake #4: Treating Loans as Non-Reportable

Many taxpayers incorrectly believe that loans from foreign trusts don't need reporting. Unless the loan meets all six stringent qualified obligation requirements, the loan proceeds are treated as a distribution and must be reported on Part III. Even if you intend to repay it, document everything properly upfront.

Mistake #5: No U.S. Agent = No Documentation

If you check "No" on line 3 (no U.S. agent appointed), you must attach voluminous trust documents—the trust instrument, all amendments, financial statements, summaries of oral agreements, and memoranda of wishes. Forgetting this makes your filing incomplete and triggers penalties. Either appoint a U.S. agent or prepare for extensive attachments.

Mistake #6: Filing One Form for Multiple Trusts

You must file a separate Form 3520 for each foreign trust. If you transferred to Trust A and received distributions from Trust B, that's two forms. Combining them creates reporting confusion and may be treated as non-filing for one trust.

Mistake #7: Ignoring Form 3520-A Requirements

If you're a U.S. owner (Part II), the trust must file Form 3520-A and provide you with a Foreign Grantor Trust Owner Statement. If it doesn't, you must prepare a substitute Form 3520-A yourself—a complex task requiring full trust accounting. Don't skip this; the penalty is the greater of $10,000 or 5% of the trust's gross value.

Source: IRS Form 3520 Instructions 2011

What Happens After You File

Normal Processing

Form 3520 is primarily informational, so the immediate aftermath is usually quiet. The IRS processes your filing at the Ogden Service Center, which specializes in international information returns. Unlike income tax returns, you won't receive a refund check or standard acknowledgment letter immediately.

Assessment Statute Extension

If you reported qualified obligations and agreed to extend the assessment period (Part I, line 12, or Part III, line 26), the IRS's ability to assess additional taxes related to those transactions extends to three years after the obligation matures. This protects the IRS if the obligation later fails to maintain qualified status.

Potential IRS Contact

The IRS may send correspondence if your filing appears incomplete, inconsistent, or raises questions. Common triggers include: missing required attachments, incomplete beneficiary information, distributions reported without accompanying trust beneficiary statements, or discrepancies between your Form 3520 and a Form 3520-A filed by the trust. Respond promptly and completely to any requests.

Income Tax Impact

Information from Form 3520 may affect your income tax return. Part III distributions from foreign nongrantor trusts often include accumulation distributions subject to special tax calculations (using Form 4970 and Schedule C). The IRS may match these amounts against your Form 1040. Ensure consistency between forms.

Penalty Notices

If you filed late or incompletely, expect a penalty notice. Section 6677 penalties for trust-related failures are the greater of $10,000 or 35% of gross reportable amounts (for transfers and distributions) or 5% (for ownership reporting). Section 6039F penalties for foreign gift reporting failures are 5% per month, up to 25%. If you receive a penalty notice, you can request abatement by demonstrating reasonable cause—showing the failure was due to circumstances beyond your control and not willful neglect.

Statute of Limitations

Generally, the IRS has three years from your Form 3520 filing date to assess related taxes. However, if you don't file a complete Form 3520, the assessment period for any tax related to the unreported transaction never begins. This creates an indefinite statute of limitations—a strong incentive for accurate, complete filing.

No Immediate Tax Bill

Remember, Form 3520 itself doesn't generate tax liability. Any taxes owed are reported and paid through your regular income tax return (Form 1040). Foreign gifts aren't taxable to recipients. Trust distributions may be taxable depending on trust type and distribution character, but those taxes aren't paid with Form 3520.

Source: IRS Form 3520 Instructions 2011

FAQs

1. Do I need to file Form 3520 if I inherited money from a foreign relative?

It depends on the amount and source. If you received more than $100,000 from a foreign individual or estate (not a trust), file Part IV. If the inheritance came from a foreign trust, report it on Part III regardless of amount. Gifts and inheritances from foreign persons aren't taxable to you, but they must be reported to the IRS for tracking purposes.

2. What if I received less than the threshold but from multiple related foreign donors?

Aggregate gifts from related parties. If your foreign mother gave you $60,000 and your foreign father gave you $50,000, that's $110,000 from related parties, exceeding the $100,000 threshold. You must file. Related persons include family members (spouses, siblings, ancestors, descendants) and entities you control. See Section 267 for complete definitions.

3. Can I file Form 3520 electronically?

Not for 2011. Form 3520 must be mailed to the Ogden Service Center. Electronic filing for Form 3520 was not available in 2011. Use certified mail or a service with tracking to confirm delivery, especially if filing late or near the deadline.

4. What happens if the foreign trust refuses to give me the information I need?

You're still required to file Form 3520 to the best of your ability. Report what you know and explain the trust's refusal in an attached statement. The IRS recognizes this difficulty but notes that foreign trustee reluctance isn't "reasonable cause" for complete non-filing. Consider whether you can appoint a U.S. agent to facilitate information sharing, or whether alternative sources (like trust distributions statements or your own records) can fill gaps.

5. I'm a dual citizen living abroad. Do these rules still apply to me?

Yes. If you're a U.S. citizen or resident alien, you must file Form 3520 regardless of where you live. U.S. tax law follows citizenship and residency, not physical location. Even if the trust is in your country of residence and seems "local" to you, it's still a foreign trust from the IRS perspective if it fails the domestic trust tests.

6. How do I know if I'm treated as the "owner" of a foreign trust?

Review the grantor trust rules in Sections 671-679. You're generally treated as the owner if: you have certain reversionary interests, you or your spouse can revoke the trust or control distributions, the trust income can be used for your benefit or to pay your life insurance premiums, or you have administrative control. If you created the trust and it's revocable, you're almost certainly the owner. When in doubt, consult a tax professional familiar with international trust taxation.

7. What's the penalty for not filing, and can it be waived?

The penalty is substantial: generally the greater of $10,000 or 35% of reportable amounts for trust transactions (transfers and distributions), or the greater of $10,000 or 5% for ownership reporting failures. For foreign gift reporting failures, it's 5% of the gift amount per month, up to 25%. However, penalties can be reduced or eliminated if you demonstrate "reasonable cause" and show the failure wasn't due to willful neglect. Document your reasons carefully and respond thoroughly to any penalty notices.

Source: IRS Form 3520 Instructions 2011

Sources

All information compiled from official IRS publications:

• Form 3520 Instructions for 2011
• Form 3520 for 2011

‍