What IRS Form 3520 (2021) Is For
IRS Form 3520 (2021) is an annual information return required by the Internal Revenue Service for U.S. persons who engage in specific foreign transactions. It is a formal record of a taxpayer’s relationship with foreign trusts and reports large gifts or bequests from foreign persons. The form ensures that individuals and entities subject to U.S. tax laws accurately report transactions with foreign trusts or the receipt of certain foreign gifts, in compliance with the Internal Revenue Code.
A U.S. citizen or resident must file Form 3520 separately from their income tax return to disclose these transactions and meet their annual reporting obligations. The requirement also applies to those receiving distributions from a foreign trust, transferring property to a foreign trust, or accepting gifts from foreign corporations, partnerships, or estates that exceed applicable reporting thresholds.
To explore other IRS forms connected to foreign transactions or trust reporting, visit our IRS Form Help Center for additional guidance.
When You’d Use Form 3520 (2021)
IRS Form 3520 (2021) is generally required in specific filing circumstances during a U.S. person’s tax year.
- Receiving Large Gifts or Bequests: You must file Form 3520 when you receive aggregate gifts or bequests from foreign persons or foreign estates exceeding the reporting thresholds established by the Internal Revenue Service.
- Foreign Trust Transactions: You must file when you transfer property to a foreign trust, are treated as the owner of a foreign grantor trust, or receive distributions from such trusts during the tax year.
- Ownership or Control Changes: The form is also used when ownership or control information for a U.S. owner of a foreign trust changes, requiring updated identifying information and responsible party details.
- Late or Amended Filing: Taxpayers file late or amended returns when they discover unreported foreign trust transactions, receive IRS notices for missing filings, or identify reporting errors for the same tax year.
For domestic estate or trust reporting obligations that may accompany foreign trust disclosures, see our detailed Form 1041 income tax return for estates and trusts guide.
Key Rules or Details for 2021
The 2021 version of IRS Form 3520 included several key provisions for U.S. citizens, residents, and entities required to report transactions with foreign trusts or receive foreign gifts. These rules were consistent with prior years but reinforced the importance of timely and accurate filing.
- Reporting Thresholds: The reporting threshold for foreign gifts from nonresident aliens and foreign estates remained at $100,000, while gifts from foreign corporations or partnerships were subject to annually adjusted limits.
- Separate Filing Requirement: A separate form must be filed for each foreign trust associated with a taxpayer, even if multiple trusts are involved in the same tax year.
- Statute of Limitations: The Internal Revenue Service may assess penalties up to three years after receiving a correctly completed and timely filed form.
- Penalty Provisions: Penalties apply to incomplete or late filings, although taxpayers may seek relief by demonstrating reasonable cause for their delay or omission.
- Income Tax Consequences: Errors or omissions on Form 3520 can lead to income tax consequences if foreign assets are misclassified or omitted from related income or estate tax returns.
If a foreign trust involves payments of U.S. source income, you may also need to review the requirements outlined in our guide to Form 1042, the annual withholding tax return for U.S. source income.
Step-by-Step (High Level)
Completing IRS Form 3520 (2021) accurately helps ensure compliance with federal reporting requirements and reduces the risk of penalties. The following steps provide a high-level overview of the filing process.
- Gather All Records: Collect all necessary trust instruments, financial statements, and documentation showing property transferred, gross value, and identifying information for foreign persons involved.
- Use Correct Form Year: Complete IRS Form 3520 (2021) specific to your tax year, ensuring that all sections correspond to the correct annual return version available on the IRS website.
- Attach Required Schedules: Include Schedule C and any substitute Form 3520-A if the foreign trust failed to file, and attach statements detailing distributions received or qualified obligations.
- Mail to the Correct Address: Please send the completed form to the Internal Revenue Service Center in Ogden, Utah, as it cannot be filed electronically.
- Keep Copies for Records: You should retain a complete copy of your submission and all supporting documents for at least three years after filing, as the IRS may request them during review or examination.
Common Mistakes and How to Avoid Them
The following are some of the most common mistakes and how to prevent them.
- Missing the Due Date: The due date for filing is April 15 for most taxpayers, or June 15 for those residing outside the United States and Puerto Rico; mark this separately from your income tax return deadline to ensure the form is timely filed.
- Incomplete Attachments: Submitting the form without required documents, such as trust instruments or financial statements, can lead to automatic penalties; always verify that all supporting documentation is included before mailing.
- Incorrect Valuations: Using inconsistent or unsupported values for property transferred or gifts received may trigger review; always calculate and report fair market value according to IRS valuation guidelines and maintain proof of these calculations.
- Failure to Aggregate Gifts: Taxpayers sometimes overlook that related gifts from the same or connected foreign persons must be combined to determine whether the reporting threshold has been met; review all sources to ensure compliance.
- Ignoring Reasonable Cause Statements: When filing late, failing to attach a reasonable cause statement explaining non-willful circumstances can prevent penalty relief; always provide a detailed and factual explanation with documentation.
If your Form 3520 issues occurred alongside unfiled or incorrect income tax returns, our resource on unfiled federal income tax returns outlines how to get back into compliance.
What Happens After You File
Once IRS Form 3520 (2021) is submitted, the Internal Revenue Service processes it as an informational return under manual review procedures. The form is not automatically matched with a taxpayer’s income tax return, so the review process can take several months, especially when it involves foreign trusts or large foreign gifts.
The IRS may issue correspondence requesting additional identifying information or clarification regarding transactions with foreign persons. Taxpayers can request penalty abatement by demonstrating reasonable cause if penalties are assessed. All correspondence typically comes from the IRS Ogden Service Center, and maintaining complete copies of your submission and supporting documents is essential for future reference or appeals.
FAQs
What are the income tax consequences of filing IRS Form 3520 (2021)?
Filing Form 3520 is primarily informational and does not directly affect your income tax liability. However, errors or omissions can create income tax consequences if foreign income or property transfers are not correctly reported on your income tax return, potentially leading to penalties or amended filings.
Who is considered a foreign person for reporting purposes?
A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate. U.S. citizens or residents must report certain transactions with these entities under the Internal Revenue Code when filing Form 3520.
Do I need to report all foreign gifts I receive?
No, only foreign gifts exceeding specific reporting thresholds must be disclosed. For 2021, the requirement applies to significant gifts from foreign persons or foreign estates exceeding $100,000 or gifts from foreign corporations or partnerships surpassing the adjusted annual limit. If you want to compare foreign gift reporting with U.S. gift tax rules, our Form 709 gift tax return guide explains how domestic gifts are taxed and documented.
Can military or naval service members receive additional filing time?
Yes, individuals serving in the military or naval service outside the United States are generally granted an automatic extension of time to file Form 3520. This provision allows them to avoid penalties if they submit the form promptly upon returning to the United States.
