What IRS Form 3520 (2014) Is For
IRS Form 3520 (2014) allows the Internal Revenue Service to monitor financial activities between U.S. persons and foreign trusts or entities. It ensures that individuals, estates, or corporations accurately report transactions involving foreign trusts, foreign financial assets, and certain foreign gifts received during the tax year. The form helps enforce foreign trust reporting requirements under the Internal Revenue Code. It identifies potential tax implications related to property transferred, distributions, or ownership of a foreign trust’s assets for income tax purposes.
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When You’d Use IRS Form 3520 (2014)
You would file Form 3520 when specific financial relationships or transactions with foreign persons or entities occur:
- Transfer of property to a foreign trust: This filing is required when a U.S. person transfers property or marketable securities to a foreign trust or a foreign grantor trust during the tax year.
- Ownership of a foreign trust: This applies when a U.S. owner is treated as holding foreign trust assets under the grantor trust rules and is required to report income for tax purposes.
- Receipt of distributions: This is necessary when a U.S. taxpayer receives trust property, principal and interest payments, or financial benefits from a foreign trust.
- Receipt of large gifts or bequests: It is required when a U.S. citizen or resident receives foreign gifts exceeding $100,000 from a nonresident alien individual or foreign estate, or more than $15,358 from a foreign corporation or partnership.
- Executor filings: Executors or responsible parties must file when handling a deceased U.S. person’s financial accounts, foreign trusts, or assets subject to foreign trust reporting.
Key Rules or Details for the 2014 Tax Year
Several vital rules governed the use of IRS Form 3520 (2014) for U.S. persons reporting transactions with foreign trusts or foreign gifts:
- Fair market value reporting: Any transfer of property to a foreign non-grantor trust after August 4, 1997, was treated as a sale or exchange for fair market value under Section 684 of the Internal Revenue Code, which required recognition of capital gains where applicable.
- Qualified obligation standards: To be considered competent, an obligation had to be written, denominated in U.S. dollars, have a term of five years or less, include a fixed interest rate within 100% to 130% of the applicable federal rate, and require annual status reporting.
- Grantor trust rules: A U.S. owner treated as holding a foreign trust’s assets under Sections 671 through 679 had to report all income from that trust for income tax purposes, even if no distributions occurred during the tax year.
- Foreign beneficiary definition: A foreign trust was presumed to have a U.S. beneficiary unless its terms permanently prohibited any distributions to U.S. persons and could not be amended to allow them.
Executors may also be responsible for filing related forms such as IRS Form 1041 (Income Tax Return for Estates & Trusts).
Step-by-Step (High Level)
Filing Form 3520 requires accuracy and documentation to ensure proper compliance with foreign trust reporting requirements:
- Identify applicable parts: Determine which sections of the form apply to your situation, such as transfers, ownership, distributions, or foreign gifts.
- Gather information: Collect identifying details about the foreign trust, including its name, country of formation, and all financial accounts or property transferred during the tax year.
- Confirm the presence of a U.S. agent: Verify whether the foreign trust appointed a U.S. agent authorized to provide trust records to the Internal Revenue Service, as this can simplify your reporting.
- Complete relevant parts:
- Part I: Complete this section if you transferred property or marketable securities to a foreign trust.
- Part II: File this part if you are treated as the owner of a foreign trust under grantor trust rules or must file a substitute Form 3520-A when the foreign trust fails to do so.
- Part III: Report any distributions of cash, property, or trust benefits received during the tax year.
- Part IV: Report foreign gifts or bequests exceeding IRS thresholds.
- Part I: Complete this section if you transferred property or marketable securities to a foreign trust.
- Attach required documents: Include copies of trust agreements, income tax returns, and all required annual statements to support your filing.
- Sign and file: Review, sign, and mail the completed form to the IRS Ogden Service Center before the filing deadline to avoid penalties.
If you are facing substantial IRS penalties from reporting issues, you might consider an IRS Offer in Compromise as a potential resolution.
Common Mistakes and How to Avoid Them
Many U.S. persons make errors when filing IRS Form 3520 (2014), often resulting in penalties or delayed processing. Being aware of these mistakes can help you avoid future compliance issues:
- Failing to file Form 3520: To avoid penalties, regularly review your foreign trust reporting obligations and report foreign gifts and other transactions promptly.
- Combining multiple foreign trusts on one form: You should prepare a separate form for each trust to ensure that the Internal Revenue Service can accurately verify all transactions.
- Incorrect fair market valuations: Always determine the fair market value of property transferred or trust assets using professional appraisals or reliable valuation methods.
- Assuming nonqualified obligations meet IRS standards: Confirm that all requirements for qualified obligations are met before reporting to avoid income tax errors.
- Incomplete trust documentation: Ensure all agreements, amendments, and memoranda affecting the trust’s operations or distributions are included.
- Ignoring constructive distributions: Always report any direct or indirect financial benefit from a foreign trust to remain compliant.
If you have incurred penalties due to filing mistakes or delays, you may qualify for IRS penalty abatement.
What Happens After You File Form 3520
Once your completed Form 3520 is received, the Internal Revenue Service reviews it for accuracy and compares it with other filings such as Form 3520-A and your income tax return. If discrepancies or omissions exist, the IRS may request clarification or documentation. Late or incomplete filings can result in significant penalties unless reasonable cause is demonstrated, such as serious illness or reliance on professional advice.
You can request an IRS account transcript to verify how your Form 3520 filing matches IRS records.
FAQs
Do I need to file Form 3520 if I have foreign financial assets in a foreign bank?
Yes, you must file Form 3520 if your foreign financial assets include interests in a foreign trust or transactions with foreign persons, regardless of whether those assets are held in a foreign bank or other financial accounts. This ensures compliance with all reporting obligations set by the Internal Revenue Service.
What are my responsibilities as an owner of a foreign trust?
An owner of a foreign trust is treated as owning the foreign trust’s assets under the grantor rules and must report all related income, property transferred, and outstanding qualified obligations. You must also include required annual statements and interest payments as part of your income tax return.
How does the IRS define control and supervision for a trust?
A trust is considered domestic if a U.S. court can exercise primary supervision over its administration and U.S. persons have authority to make substantial decisions. If either test fails, it is a foreign trust subject to foreign trust reporting requirements.
Are there any exceptions for Canadian or other retirement plans?
Certain transactions involving a Canadian retirement plan, such as RRSPs and RRIFs, are exempt if they meet the criteria outlined in Revenue Procedure 2014-55. These plans generally do not require filing Form 3520 unless they hold foreign trust assets treated as taxable for income tax purposes.
