What IRS Form 3520 (2023) Is For
IRS Form 3520 (2023) is an annual information return that helps the Internal Revenue Service monitor transactions involving foreign trusts and significant foreign gifts. It applies to U.S. persons who engage in certain transactions with foreign trusts, receive distributions, or obtain gifts or bequests from foreign individuals or entities. The form is not an income tax return but a mandatory disclosure required under the Internal Revenue Code to ensure transparency in cross-border financial activities. It also assists the IRS in identifying whether additional income tax reporting may be necessary for a person’s tax year.
This form also ensures taxpayers disclose any foreign trust ownership or related property transfers. It applies when a U.S. person has substantial decisions or control over such a foreign trust or when they receive large gifts or inheritances from foreign persons. Reporting these transactions accurately helps taxpayers comply with U.S. tax law and avoid penalties for failing to disclose foreign financial assets or trust property outside the United States.
For support with additional international and domestic IRS forms connected to foreign trust reporting, you can review our IRS Form Help Center for guidance on related filing requirements.
When You’d Use Form 3520 for 2023
You would use IRS Form 3520 (2023) when specific reportable transactions that involve foreign trusts, foreign gifts, or related entities occur during your tax year.
- Late discovery of reporting obligations: A U.S. person realizes after the due date that they failed to file Form 3520 for transactions with foreign trusts or receipt of large foreign gifts.
- Receiving large gifts: You received foreign gifts or bequests from a foreign individual, corporation, or partnership that exceed the applicable reporting thresholds for the 2023 tax year.
- Amending prior filings: You must correct information on a previously filed form, such as a fair market value calculation or identifying information for a foreign person.
- Unreported trust ownership: Under the grantor trust rules, you are treated as owning a foreign trust’s assets and must report this relationship to the Internal Revenue Service.
- Military or naval service exception: You serve in the army or naval service outside the United States and qualify for delayed filing based on your service status.
If your situation also involves domestic estate or trust obligations, our resource on the Form 1041 income tax return for estates and trusts explains how these filings interact with foreign trust reporting.
Key Rules or Details for the 2023 Tax Year
The IRS Form 3520 (2023) includes specific updates and requirements for transactions, gifts, and foreign trust reporting for the 2023 tax year.
- Reporting thresholds: According to the Internal Revenue Code, you must report gifts exceeding $100,000 from foreign individuals and more than $18,567 from foreign corporations or partnerships for 2023.
- Reasonable cause requirement: To avoid penalties, you must demonstrate that your failure to file Form 3520 promptly resulted from reasonable cause and not willful neglect.
- Fair market value reporting: You must report the gross value of property transferred or trust assets using fair market value as of the transaction date.
- Separate forms per trust: You must file an individual tax form for each foreign trust, even if the transactions occurred in the same U.S. person’s tax year.
- Exclusions: You cannot use foreign laws or trust restrictions to justify noncompliance, as these do not qualify as reasonable cause under IRS guidelines.
When foreign trusts include U.S.-source income, the withholding rules described in our Form 1042 annual withholding tax return guide may also apply to your reporting.
Step-by-Step (High Level)
The process for filing or amending IRS Form 3520 (2023) involves several essential steps to ensure compliance and accuracy.
- Gather tax transcripts and documentation: Before completing the form, obtain IRS account transcripts and collect records related to foreign trusts, corporations, and financial assets.
- Complete the correct-year form: Use the December 2023 revision of IRS Form 3520, marking the “Amended Return” box if you submit corrections to a prior filing.
- Attach required schedules: Include all relevant schedules, such as those for distributions or transfers, and attach a substitute Form 3520-A if the foreign trust failed to file.
- Mail the form: Send the completed filing package to the Internal Revenue Service Center in Ogden, Utah, as Form 3520 cannot be submitted electronically.
- Keep proof of filing: Retain copies of your submission, including certified mail receipts, to confirm that you filed Form 3520 promptly and can demonstrate compliance if questioned.
- Consult a tax professional: Engage a qualified tax professional to review reporting obligations, evaluate fair market value determinations, and ensure accurate identification of foreign trust assets.
To compare foreign gift reporting with U.S. gift tax rules, you can review our Form 709 gift tax return guide, which explains domestic gift reporting requirements.
Common Mistakes and How to Avoid Them
Many taxpayers make avoidable mistakes when completing IRS Form 3520 (2023), which can result in penalties or processing delays. Being aware of these issues helps ensure accuracy and compliance with reporting requirements.
- Combining multiple trusts on one form: You must file a separate Form 3520 for each foreign trust rather than consolidating multiple trusts on a single tax form.
- Misunderstanding reporting thresholds: To ensure you meet the correct reporting thresholds, you should apply the $100,000 limit to foreign individuals and the $18,567 limit to foreign corporations or partnerships.
- Incomplete reasonable cause statements: You must include a written explanation under penalty of perjury when requesting penalty relief, clearly stating why your failure to file was not due to willful neglect.
- Omitting substitute Form 3520-A: You must attach a substitute form if the foreign trust did not file its annual return, as failure to do so may result in additional penalties.
- Incorrect fair market value reporting: You should calculate the fair market value of trust property using the applicable IRS valuation rules and maintain supporting documentation for accuracy.
If your late Form 3520 filing coincides with missing or incorrect income tax returns, our guide to unfiled federal income tax returns explains how to get fully back into IRS compliance.
What Happens After You File
Once you file IRS Form 3520 (2023), the Internal Revenue Service will review your submission and may request additional documentation to verify reported transactions. Depending on the complexity of the information and whether it involves foreign trusts or large gifts, the review process can take several months.
If you submitted the form late, providing a valid, reasonable cause statement may support a request for penalty abatement. Should penalties remain, you can file an appeal with the IRS Office of Appeals within 30 days of receiving a denial notice. You can request an installment agreement using Form 9465 to manage payments efficiently if tax or penalties are owed.
FAQs
How do foreign financial assets relate to IRS Form 3520 (2023)?
Foreign financial assets, such as foreign trusts, accounts, or large gifts, must be reported if they meet the filing thresholds under IRS Form 3520 (2023). If you have an outstanding qualified obligation, you must still disclose these assets to ensure compliance and avoid penalties.
What qualifies as a foreign trust under IRS Form 3520 (2023)?
A foreign trust does not meet the court and control tests for classification as a domestic trust. If you are treated as owning a foreign trust’s assets under the grantor trust rules, you must report them to the Internal Revenue Service.
How are principal and interest payments reported on Form 3520?
All principal and interest payments related to transactions with a foreign trust must be reported at their fair market value on IRS Form 3520 (2023). If the payments are tied to a qualified obligation, you must include proper documentation to support compliance and calculation accuracy.
How do I timely report foreign gifts on IRS Form 3520 (2023)?
You must report all qualifying foreign gifts that exceed the annual reporting thresholds during your tax year. If the gifts involve a qualified obligation or a foreign trust’s assets, ensure they are disclosed accurately to prevent additional tax owed or penalties.
