Navigating international tax obligations can feel overwhelming, especially when it involves foreign trusts and gifts from overseas. Form 3520 is the IRS's way of keeping track of U.S. persons who have financial relationships with foreign trusts or who receive substantial gifts from foreign individuals or entities. This guide breaks down everything you need to know about the 2014 version of this important tax form in plain English.

What Form 3520 Is For

Form 3520 serves as the IRS's window into your financial dealings with foreign trusts and your receipt of large gifts from foreign sources. If you're a U.S. person—which includes U.S. citizens, resident aliens, domestic partnerships, domestic corporations, and certain estates and trusts—you'll need this form to report specific international financial activities.

The form has four main reporting purposes, each covered in a separate part. Part I handles transfers you made to a foreign trust during the tax year. This includes creating a new foreign trust, transferring money or property to an existing one, or if you're an executor handling transfers made by a deceased U.S. person. Part II is for U.S. owners of foreign trusts—people who are treated as owning all or part of a foreign trust's assets under grantor trust rules (sections 671 through 679 of the tax code). Part III covers distributions you received from a foreign trust, including cash, property, or even the uncompensated use of trust property like staying in a trust-owned vacation home without paying fair market value. Part IV is specifically for reporting large gifts or bequests you received from foreign individuals, estates, corporations, or partnerships.

The dollar thresholds matter significantly. For 2014, you must report if you received more than $100,000 from a nonresident alien individual or foreign estate, or more than $15,358 from foreign corporations or foreign partnerships that you treated as gifts. These reporting requirements exist whether or not the amounts are taxable—the IRS wants visibility into these transactions regardless of tax consequences.

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

Filing Deadlines

Form 3520 follows the same filing deadline as your income tax return. For most individual taxpayers using the calendar year, this means April 15, 2015 for the 2014 tax year. If you filed an extension for your 2014 income tax return using Form 4868, your Form 3520 deadline extends to October 15, 2015. The form must be mailed to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Executors

If you're an executor filing for a deceased U.S. person, the due date aligns with Form 706 (the estate tax return), including any extensions, or when it would be due if required. You must file a separate Form 3520 for each foreign trust you're reporting on—you cannot combine multiple trusts onto a single form.

Late Filing

Late filing triggers serious consequences. If you miss the deadline without reasonable cause, penalties begin immediately. The IRS doesn't take missed filings lightly because these forms are crucial for tracking potential tax evasion through foreign structures.

Amended Returns

Amended returns are filed when you need to correct information on a previously submitted Form 3520. Simply check the "Amended return" box at the top of the form and complete the corrected information. You should file an amended return as soon as you discover errors or omissions on your original filing. Common reasons include discovering additional distributions you received, correcting property valuations, or adding trust information you initially omitted.

Final Returns

Final returns should be filed when no further reporting for a particular foreign trust is required—for example, when a trust terminates or when you're no longer treated as an owner or beneficiary. Check the "Final return" box to alert the IRS that this is your last filing concerning that specific trust.

Key Rules or Details for 2014

Fair Market Value Rule (Section 684)

The fair market value rule was fundamental: when you transferred property to a foreign trust, you were generally required to recognize gain immediately. Under section 684, transfers to foreign nongrantor trusts after August 4, 1997, are treated as sales or exchanges. You must recognize as gain the excess of the property's fair market value over your adjusted basis, even if you received nothing in return. This gain doesn't appear on Form 3520 itself but must be reported on your income tax return.

Qualified Obligations

Qualified obligations were important for avoiding immediate taxation. When you transferred property to a foreign trust in exchange for an obligation (like a promissory note), that obligation was valued at zero unless it met strict requirements to be "qualified." For 2014, a qualified obligation had to be in writing, have a term of 5 years or less, be denominated in U.S. dollars, carry an interest rate between 100% and 130% of the applicable federal rate, include your agreement to extend the statute of limitations for assessment, and require annual reporting of its status.

Grantor Trust Rules (Sections 671–679)

The grantor trust rules under sections 671-679 determined whether you were treated as owning foreign trust assets for tax purposes. If you were treated as an owner, you had to report all trust income on your personal return and complete Part II of Form 3520, even if the trust made no distributions during the year. After March 18, 2010 (due to the HIRE Act), loans from foreign trusts to U.S. persons or uncompensated use of trust property could cause the trust to be treated as a grantor trust.

U.S. Beneficiary Definitions and Presumptions

U.S. beneficiary definitions were expansive. You were considered a U.S. beneficiary if you could possibly benefit from the trust at any time, whether named in the trust document or not. A foreign trust was presumed to have a U.S. beneficiary unless its terms specifically prohibited any distribution to U.S. persons, even after the grantor's death, and couldn't be amended to allow such distributions.

Reference ID Number System

The reference ID number system allowed tracking of foreign trusts that didn't have U.S. employer identification numbers. You could create your own alphanumeric reference ID (up to 50 characters, no special characters) to identify a foreign trust consistently from year to year.

Step-by-Step (High Level)

Step 1: Determine which parts apply to you.

Review the four checkboxes on page 1 to identify which parts of the form you need to complete. You might need to complete multiple parts if you had different types of transactions with the same trust.

Step 2: Gather identifying information.

Complete the top section with your personal information (name, taxpayer identification number, address, and filing status). If filing for multiple activities with the same trust, your spouse may join you on one form only if you file a joint income tax return. Enter the foreign trust's information in section 2, including its name and either an employer identification number or a reference ID number you create.

Step 3: Determine if the trust has a U.S. agent.

Answer question 3 about whether the foreign trust appointed a U.S. agent authorized to provide records to the IRS. Having a U.S. agent simplifies some reporting requirements. If no agent exists, you'll need to attach extensive trust documentation.

Step 4: Complete Part I if you made transfers.

If you transferred property to a foreign trust during 2014, complete Part I with detailed information about the trust creator, the country where it was created, and its beneficiaries. Schedule A covers obligations you received from the trust. Schedule B details gratuitous transfers (transfers for less than fair market value), requiring you to list each transfer's date, description, fair market value, your adjusted basis, and any gain recognized. Schedule C tracks qualified obligations that remained outstanding during the tax year.

Step 5: Complete Part II if you're an owner.

U.S. owners must complete Part II even if no transactions occurred during the year. You must attach either the Foreign Grantor Trust Owner Statement from Form 3520-A filed by the trust, or if the trust didn't file Form 3520-A, you must complete a substitute Form 3520-A yourself. This reports all trust income, deductions, and credits you must recognize.

Step 6: Complete Part III if you received distributions.

Report all distributions, including cash, property, and uncompensated use of trust property. Schedule A provides the default calculation method for determining tax on accumulation distributions, while Schedule B allows actual calculations if you have the necessary information. Schedule C calculates interest charges on accumulation distributions using Form 4970.

Step 7: Complete Part IV for foreign gifts.

List each gift or bequest over $5,000 that, in aggregate, exceeded the reporting thresholds ($100,000 from individuals/estates or $15,358 from corporations/partnerships). Include the date, description, and fair market value of each gift.

Step 8: Attach required documentation.

Depending on your answers, you may need to attach trust documents, sale or loan agreements, Form 3520-A statements, Form 4970 for accumulation distribution calculations, and explanations of unusual transactions.

Step 9: Sign and file.

Sign and date the form under penalties of perjury. Mail it to the Ogden Service Center at the address provided. Keep copies of everything for your records.

Common Mistakes and How to Avoid Them

Mistake 1: Failing to file at all.

Many U.S. persons don't realize they have filing obligations, especially for Part IV foreign gift reporting. If a foreign relative gives you $150,000, you must report it even though it's not taxable income. The penalty for failing to file can be severe—5% of the gift amount per month up to 25%.

How to avoid it: Review the filing requirements annually, especially after major life events like inheritances, family gifts, or establishing any foreign financial relationships. If you're unsure whether filing is required, consult the instructions or seek professional advice—the cost is far less than penalties.

Mistake 2: Missing the separate form requirement.

Form 3520 requires a separate form for each foreign trust. If you dealt with three foreign trusts in 2014, you need three separate Form 3520 filings.

How to avoid it: Create a tracking spreadsheet listing each foreign trust you're involved with and the reporting obligations for each. File separate forms even if the trusts are related or serve similar purposes.

Mistake 3: Incorrect property valuations.

The IRS requires fair market value determinations using the same standards as estate tax valuations under section 2031. Guessing or using outdated values can trigger penalties if the IRS determines your valuations were unreasonably low.

How to avoid it: For significant property transfers, obtain professional appraisals. For securities, use values from the transfer date. Keep contemporaneous documentation explaining your valuation methodology and supporting data.

Mistake 4: Treating non-qualified obligations as qualified.

Many filers incorrectly treat obligations as "qualified" without meeting all six requirements. If an obligation doesn't qualify, its fair market value is zero for reporting purposes, meaning you report the full transfer amount rather than reducing it by the obligation's face value.

How to avoid it: Carefully review all six requirements for qualified obligations in the instructions. If any requirement isn't met—even something seemingly minor like denominating the loan in euros instead of dollars—the obligation isn't qualified. When in doubt, treat it as non-qualified.

Mistake 5: Incomplete trust documentation.

If the foreign trust doesn't have a U.S. agent, you must attach comprehensive trust documents. Many filers attach only the trust instrument, omitting memoranda of wishes, subsequent amendments, or oral agreement documentation.

How to avoid it: Read lines 18a through 18f carefully. They specify exactly which documents are required. Gather all trust-related documents, including informal agreements that might affect distributions. If documents were attached to a Form 3520-A within the previous three years, you only need to attach updates.

Mistake 6: Overlooking constructive distributions.

Distributions include more than just cash transfers. Using a foreign trust's credit card, living in trust-owned property without paying rent, or receiving loan guarantees from the trust all constitute distributions requiring reporting.

How to avoid it: Review the definition of "distribution" in the instructions, which includes constructive transfers and uncompensated use of property. Calculate fair market value for any trust benefits you received, even if no money changed hands.

Mistake 7: Missing statute of limitations extensions.

When you report qualified obligations, you generally must agree to extend the assessment period for three years after the obligation's maturity date. Failing to check the appropriate box (line 12 for Part I or line 26 for Part III) means the obligation wasn't properly reported as qualified.

How to avoid it: If you answer "Yes" to qualified obligations on line 11b or line 25, you must also answer "Yes" on line 12 or line 26. These go together—one doesn't work without the other.

What Happens After You File

Immediate processing

The IRS receives your Form 3520 at the Ogden Service Center, where it's scanned and logged into their system. The form becomes part of your tax filing history and is matched against your income tax return for consistency.

Penalty assessment or waiver

If your filing is late, the IRS may assess penalties automatically. For Part IV foreign gifts, the initial penalty equals the greater of $10,000 or 5% of the gross value of property transferred or distributed. For Parts I through III, penalties can reach 35% of the gross reportable amount. However, if you can demonstrate reasonable cause for the late filing, penalties may be waived. The IRS considers factors like reasonable reliance on professional advice, serious illness, and circumstances beyond your control. Importantly, the instructions explicitly state that foreign law prohibiting disclosure or trust provisions restricting information sharing do not constitute reasonable cause.

Statute of limitations impact

Filing Form 3520 affects how long the IRS can audit related tax issues. If you file a complete and timely Form 3520, the normal statute of limitations applies. However, if you don't file or file an incomplete form, the assessment period for any tax related to the reported transactions doesn't begin running until you provide the required information. This means the IRS could potentially audit those transactions indefinitely until you file properly.

Information matching

The IRS compares Form 3520 information with Forms 3520-A filed by foreign trusts, Forms 709 (gift tax returns), Forms 706 (estate tax returns), and your income tax return. Inconsistent reporting triggers inquiries. If the foreign trust reports different amounts or characterizations than you report, you must file Form 8082 to notify the IRS of the inconsistency.

Ongoing obligations

Filing Form 3520 for one year doesn't end your obligations. If you remain a trust owner, you must file Part II annually, even if no transactions occur. If you reported qualified obligations, you must track them and report their status each year they remain outstanding, including principal and interest payments made.

IRS examination

The IRS may select your Form 3520 for examination, particularly if it shows large transfers, complex structures, or patterns suggesting tax avoidance. During an examination, the IRS can request additional documentation, interview you about the foreign trust, and seek records from the trust itself through the U.S. agent if one was designated. If no U.S. agent exists, the IRS's ability to obtain information is limited, but penalties for non-cooperation can be substantial.

Reasonable cause determinations

If you're assessed penalties, you can request abatement by demonstrating reasonable cause. Submit a written statement explaining the circumstances that prevented timely filing, along with supporting documentation. The IRS evaluates these requests case-by-case, considering the facts and circumstances.

FAQs

1. Do I need to report gifts from foreign relatives if they're not taxable?

Yes. Part IV reporting is required regardless of whether the gifts are taxable. The $100,000 threshold for gifts from foreign individuals (or $15,358 from foreign corporations/partnerships) triggers reporting obligations even though receiving gifts generally isn't taxable income. The IRS uses this information to track potential disguised income and ensure proper oversight of international wealth transfers. Failure to report can result in penalties equal to 5% of the gift amount per month, up to 25% total.

2. What's the difference between a foreign trust and a domestic trust?

A domestic trust must satisfy two requirements: (1) a U.S. court must be able to exercise primary supervision over the trust's administration, and (2) one or more U.S. persons must have authority to control all substantial trust decisions. Any trust failing either test is foreign. Notably, a trust created under foreign law isn't automatically foreign if it meets both requirements, and a trust created under U.S. law isn't automatically domestic if U.S. persons don't control it or U.S. courts can't supervise it.

3. I'm a beneficiary of my deceased grandmother's foreign trust. Do I need to file Form 3520 if I haven't received any distributions yet?

Possibly. If the foreign trust made no distributions to you during 2014, you wouldn't complete Part III. However, if you're treated as owning part of the trust under sections 671-679, you must complete Part II. Additionally, if your grandmother (a U.S. decedent) made a testamentary transfer to the trust, the executor might need to file Form 3520 Part I. Your future distributions will require Part III reporting when received.

4. Can I file Form 3520 electronically?

For the 2014 tax year, Form 3520 could not be filed electronically. It required paper filing by mail to the Ogden Service Center. You should keep a complete copy of everything you mail, including all attachments, and consider using certified mail with return receipt to prove timely filing.

5. What if the foreign trust doesn't provide me with the required Form 3520-A statements?

If you're a U.S. owner (Part II) and the foreign trust fails to file Form 3520-A or doesn't provide you with the required Foreign Grantor Trust Owner Statement, you must prepare a substitute Form 3520-A yourself "to the best of your ability" and attach it to your Form 3520. This can be challenging if the trust doesn't cooperate by providing financial information, but the obligation remains. Failure to attach the required information can result in penalties under section 6677. If you're a beneficiary receiving distributions (Part III) and don't receive the Foreign Nongrantor Trust Beneficiary Statement, you must use the default calculation method in Schedule A, which may result in higher tax than the actual calculation method.

6. Are there any transfers to foreign trusts that don't require Form 3520 reporting?

Yes, several exceptions exist. You don't need to file for: (1) most fair market value transfers, though some FMV transfers still require reporting if made in exchange for obligations treated as qualified or if you're related to the trust; (2) transfers to foreign trusts described in sections 402(b), 404(a)(4), or 404A (certain employee benefit trusts); (3) transfers to or distributions from Canadian RRSPs, RRIFs, or similar Canadian retirement plans meeting the requirements of Revenue Procedure 2014-55; (4) distributions treated as compensation for services if properly reported as compensation income; and (5) transfers to or distributions from trusts with IRS determination letters recognizing section 501(c)(3) tax-exempt status.

7. What happens if I filed Form 3520 but later discover I made errors?

You should file an amended Form 3520 as soon as you discover the errors. Check the "Amended return" box and complete the form with corrected information. Include an explanation of what you're correcting and why. Filing an amended return proactively demonstrates good faith and may help you avoid or reduce penalties if the IRS later examines your return. The amended return doesn't extend the statute of limitations—it runs from your original filing date if that filing was substantially complete, or from the amended filing date if the original was incomplete.

Additional Resources

For More Information

All information in this guide comes directly from the official 2014 Form 3520 instructions and form available at IRS.gov. For the most current information about Form 3520, including updates and developments, visit www.irs.gov/form3520. The 2014 instructions are available at https://www.irs.gov/pub/irs-prior/i3520--2014.pdf, and the 2014 form is available at https://www.irs.gov/pub/irs-prior/f3520--2014.pdf.

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