IRS Form 3520 (2020): Late & Amended Filing Guide

What IRS Form 3520 (2020) Is For

IRS Form 3520 (2020) is an annual return to report transactions with foreign trusts and receipt of certain foreign gifts. It is required for any U.S. person who engages in specific activities involving foreign trusts or receives large gifts or bequests from foreign persons. The form ensures transparency and helps the Internal Revenue Service enforce the reporting requirements that apply to foreign entities and assets under the Internal Revenue Code.

This form applies when a U.S. citizen or resident participates in or benefits from a foreign trust, transfers property, or receives gifts or bequests from a foreign person, partnership, or corporation. It is also used to disclose ownership under the grantor trust provisions and report the fair market value of property transferred for income tax or estate tax purposes. Form 3520 is a critical informational return designed to ensure compliance and accurate disclosure of cross-border transactions involving foreign trusts and foreign gifts. 

For U.S. estate or domestic trust reporting that may interact with foreign trust disclosures, review our Form 1041 income tax return for estates and trusts guide.

When You’d Use IRS Form 3520 (2020)

Taxpayers who file IRS Form 3520 (2020) when they discover past unreported foreign transactions must correct earlier submissions or comply with missed reporting obligations.

1. Transfers to Foreign Trusts: A U.S. person must file Form 3520 when transferring property or marketable securities to a foreign trust and report the gross value of such transfers for compliance.
   
   
2. Ownership of a Foreign Trust: Filing is required when the taxpayer is considered the owner under grantor trust provisions and must disclose ownership for income tax purposes.
   
   
3. Distributions from Foreign Trusts: Taxpayers must report all distributions, including trust assets, principal, interest payments, or medical payments from a foreign trust.
   
   
4. Receipt of Large Gifts: Reporting is required when a U.S. person receives foreign gifts or gifts from a foreign corporation or partnership exceeding threshold limits.
   
   
5. Late or Amended Filings: Individuals file when late-filed forms or amended returns are needed due to prior errors or missed reporting obligations.

When large transfers resemble taxable gifts, it can help to compare Form 3520 rules with our Form 709 gift tax return guide so you understand how U.S. gift tax reporting works.

Key Rules or Details for the 2020 Tax Year

For the 2020 tax year, specific deadlines, exemptions, and reporting conditions applied to IRS Form 3520 (2020) that taxpayers must follow to avoid penalties.

1. Filing Deadline: The form was due on April 15, 2021, with an automatic extension available until October 15. Taxpayers needed to file promptly to prevent automatic penalties.
   
   
2. Rev. Proc. 2020-17 Exemptions: Certain transactions with foreign grantor trusts established for retirement or savings purposes were exempt from foreign trust reporting requirements.
   
   
3. HIRE Act Provisions: Loans or use of trust property by a U.S. person from a foreign trust were treated as having a U.S. beneficiary for income tax purposes.
   
   
4. Fair Market Value Reporting: The fair market value of trust assets or foreign gifts must be reported under section 2512 regulations for accurate valuation.
   
   
5. Responsible Party Requirements: The responsible party was required to exercise primary supervision over the filing and ensure that all substantial decisions were disclosed correctly.

If a foreign trust has U.S. source income paid to foreign beneficiaries, you may also need to understand Form 1042 annual withholding tax return for U.S. source income.

Step-by-Step (High Level)

Taxpayers must follow several steps to correctly complete and submit IRS Form 3520 (2020) while meeting all reporting requirements.

1. Gather IRS Transcripts: Request individual income tax return transcripts from the Internal Revenue Service to identify prior assessments, notices, or penalties imposed related to foreign trust reporting.
   
   
2. Use the Correct-Year Form: Always use the official 2020 version of Form 3520 to ensure that all reported transactions with foreign trusts and foreign gifts correspond to the proper tax year.
   
   
3. Attach Required Schedules: Include every applicable schedule and attach a substitute Form 3520-A if the foreign trust fails to file its return, along with all supporting documentation.
   
   
4. Mail to the Correct Address: Send the completed form and attachments to the Internal Revenue Service Center in Ogden, Utah, as electronic filing is not available for this form.
   
   
5. Maintain Documentation: Keep copies of the annual return, proof of mailing, and any reasonable cause statements submitted for your records to demonstrate compliance.

If you are working with multiple international or estate forms, our IRS Form Help Center walks you through other key filings that often accompany Form 3520.

Common Mistakes and How to Avoid Them

Avoiding common filing mistakes can prevent significant penalties and ensure compliance with IRS Form 3520 (2020) reporting requirements.

• Combining Multiple Trusts on One Form: Form 3520 must be filed for each foreign trust to maintain proper reporting accuracy and meet disclosure obligations.
  
  
• Missing Substitute Form 3520-A: If the foreign trust fails to file its required return, the U.S. owner must attach a substitute Form 3520-A to demonstrate reasonable cause and avoid such penalties.
  
  
• Incorrect Valuation Methods: To ensure the correct reporting of the gross reportable amount, taxpayers must determine the fair market value of trust assets based on section 2512 regulations.
  
  
• Ignoring Qualified Obligation Reporting: Any outstanding qualified obligation or qualified tuition loan must be disclosed annually to prevent additional penalties from being imposed.
  
  
• Inadequate Reasonable Cause Statement: A reasonable cause statement should clearly explain why the failure occurred and prove that it was not neglectful.
  
  
• Submitting Late-filed Forms Without Explanation: When a taxpayer fails to file on time, a reasonable cause exception statement must accompany the submission to justify the delay.

What Happens After You File

After submitting IRS Form 3520 (2020), the Internal Revenue Service typically requires several months to process the filing and may request supporting documents or clarifications. Once a complete and accurate return is filed, automatic penalties stop accruing, but previously assessed penalties may still need resolution. 

Taxpayers can submit reasonable cause statements to request penalty relief or appeal any penalties imposed. The IRS generally retains the authority to assess penalties for up to three years after filing a complete return, allowing time to review and verify all transactions. If you already received Form 3520 penalties, our IRS penalty abatement guide explains how to request relief using reasonable cause and other available options.

FAQs

What are the reporting requirements for foreign gifts?

A U.S. person must report all foreign gifts received that exceed IRS thresholds on IRS Form 3520 (2020). These gifts may come from a foreign person, foreign corporation, or foreign partnership, and failure to report them properly can result in penalties imposed by the Internal Revenue Service.

When must transactions with a foreign trust be reported?

You must report transactions when you create, transfer to, or receive distributions from a foreign trust. Reporting ensures compliance under the Internal Revenue Code and helps confirm the fair market value of any property transferred or trust assets received.

What does “foreign trust immediately prior” mean on the form?

A “foreign trust immediately prior” refers to the trust’s status before any transfer or ownership change. This distinction helps determine whether the trust qualifies as a domestic trust or remains a foreign trust for income tax purposes.

How are a foreign trust’s assets treated under U.S. tax rules?

A foreign trust’s assets treated as owned by a U.S. person must be reported for income tax and estate tax purposes. The taxpayer must disclose the gross value and maintain documentation supporting all foreign trust reporting requirements.

‍