General Instructions

Future Developments

For the latest information about developments related to Form 3520 and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form3520.

What's New

Extension to file.   A new line 1k has been added to indicate that an extension of time to file your tax return has been sent to the IRS. See page 1 of Form 3520.

Reference ID number.   On page 1 of the form, line 2b(2) is new. This new line requests the reference ID number of the foreign trust in certain cases. See the instructions for Part I, line 2b(2) for details.

Joint income tax return.   A check box has been added to report that you are married filing a joint income tax return, but each spouse files a separate Form 3520. See line 1i of 
Form 3520.

Purpose of Form

U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:

  • Certain transactions with foreign trusts,

  • Ownership of foreign trusts under the rules of sections 671 through 679, and

  • Receipt of certain large gifts or bequests from certain foreign persons.

A separate Form 3520 must be filed for transactions with each foreign trust.

Who Must File

File Form 3520 if any one or more of the following applies:

  1. You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or an obligation of a person related to the trust) that you treated as a qualified obligation during the current tax year. Responsible party, reportable event, and qualified obligation are defined later.

    Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for Part I.

  2. You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.

    Complete the identifying information on page 1 of the form and Part II. See the instructions for Part II.

    Note.

    You are required to complete Part II even if there have been no transactions involving the trust during the tax year.

  3. You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust (including the uncompensated use of trust property) during the current tax year or a related foreign trust held an outstanding obligation issued by you (or an obligation of a person related to you) that you treated as a qualified obligation (defined later) during the current tax year.

    Complete the identifying information on page 1 of the form and Part III. See the instructions for Part III.

  4. You are a U.S. person who, during the current tax year, received either:

    1. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

    2. More than $15,102 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

      Complete the identifying information on page 1 of the form and Part IV. See the instructions for Part IV.

Note.

You may also be required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

Exceptions To Filing

Form 3520 does not have to be filed to report the following transactions.

  • Transfers to foreign trusts described in sections 402(b), 404(a)(4), or 404A.

  • Most fair market value (FMV) transfers by a U.S. person to a foreign trust. However, some FMV transfers must nevertheless be reported on Form 3520 (e.g., transfers in exchange for obligations that are treated as qualified obligations, transfers of appreciated property to a foreign trust for which the U.S. transferor does not immediately recognize all of the gain on the property transferred, transfers involving a U.S. transferor that is related to the foreign trust). See section III of Notice 97-34, 1997-25 I.R.B. 22.

  • Transfers to foreign trusts that have a current determination letter from the IRS recognizing their status as exempt from income taxation under section 501(c)(3).

  • Transfers to, ownership of, and distributions from a Canadian registered retirement savings plan (RRSP) or a Canadian registered retirement income fund (RRIF), where the U.S. citizen or resident alien holding an interest in such RRSP or RRIF is eligible to file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF.

  • Distributions from foreign trusts that are taxable as compensation for services rendered (within the meaning of section 672(f)(2)(B) and its regulations), so long as the recipient reports the distribution as compensation income on its applicable federal income tax return.

  • Distributions from foreign trusts to domestic trusts that have a current determination letter from the IRS recognizing their status as exempt from income taxation under section 501(c)(3).

  • Domestic trusts that become foreign trusts to the extent the trust is treated as owned by a foreign person, after application of section 672(f).

Joint Returns

Two transferors or grantors of the same foreign trust, or two U.S. beneficiaries of the same foreign trust, may file a joint Form 3520, but only if they file a joint income tax return.

Additional Reporting Information

For more information on foreign trust reporting, including abusive foreign trust schemes, go to the IRS website at IRS.gov.

When and Where To File

In general, Form 3520 is due on the date that your income tax return is due, including extensions. In the case of a Form 3520 filed with respect to a U.S. decedent, Form 3520 is due on the date that Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is due (including extensions), or would be due if the estate were required to file a return.

Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Form 3520 must have all required attachments to be considered complete.

Note.

If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).

Who Must Sign

If the return is filed by:

  • An individual or a fiduciary, it must be signed and dated by that individual or fiduciary.

  • A partnership, it must be signed and dated by a general partner or limited liability company member.

  • A corporation, it must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or any other corporate officer (such as a tax officer) who is authorized to sign.

The paid preparer must complete the required preparer information at the bottom of page 6 of Form 3520 and must be sure to:

  • Sign the return in the space provided for the preparer's signature.

  • Give a copy of the return to the filer.

Inconsistent Treatment of Items

The U.S. beneficiary and U.S. owner's tax return must be consistent with the Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, filed by the foreign trust unless you report the inconsistency to the IRS. If you are treating items on your tax return differently from the way the foreign trust treated them on its return, file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). See Form 8082 for more details.

Penalties

Section 6677.   A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or:
  • 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or

  • 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or

  • 5% of the gross value of the portion of the trust's assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.

  Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.

Reasonable cause.

No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

Note.

The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause. See section 6677(d) for additional information.

Section 6039F.   In the case of a failure to report foreign gifts described in section 6039F, a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. See section 6039F for additional information.

Section 6662(j).   Penalties may be imposed under section 6662(j) for undisclosed foreign financial asset understatements. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See section 6662(j) and section 6664(c) for additional information.

Definitions

Distribution

A distribution is any gratuitous transfer of money or other property from a trust, whether or not the trust is treated as owned by another person under the rules of sections 671 through 679, and without regard to whether the recipient is designated as a beneficiary by the terms of the trust. A distribution includes the receipt of trust corpus and the receipt of a gift or bequest described in section 663(a).

A distribution also includes constructive transfers from a trust. For example, if charges you make on a credit card are paid by a foreign trust or guaranteed or secured by the assets of a foreign trust, the amount charged will be treated as a distribution to you by the foreign trust. Similarly, if you write checks on a foreign trust's bank account, the amount will be treated as a distribution.

Also, if you receive a payment from a foreign trust in exchange for property transferred to the trust or services rendered to the trust, and the FMV of the payment received exceeds the FMV of the property transferred or services rendered, the excess will be treated as a distribution to you.

Examples   
  1. If you sell stock with an FMV of $100 to a foreign trust and receive $150 in exchange, you have received a distribution of $50.

  2. If you receive $100 from the trust for services performed by you for the trust, and the services have an FMV of $20, you have received a distribution of $80.

  

Note.

Due to changes to section 679(c) made by the HIRE Act, effective after March 18, 2010, a loan of cash or marketable securities from a foreign trust with a U.S. grantor, directly or indirectly, to a U.S. person, or the use of any other trust property, directly or indirectly, by any U.S. person (whether or not a beneficiary under the terms of the trust) will cause a foreign trust to be treated as a grantor trust, unless the U.S. person repays the loan at a market rate of interest or pays the FMV of the use of such property within a reasonable period of time. Thus, in the case of a trust with a U.S. grantor that is treated as a grantor trust, the following two paragraphs will generally not apply to loans made to U.S. persons from such a foreign trust or to the use of other trust property by U.S. persons from such a foreign trust after March 18, 2010.

  If a U.S. grantor, a U.S. beneficiary, or a U.S. person related to the U.S. grantor or U.S. beneficiary, directly or indirectly, receive(s) a loan of cash or marketable securities from a foreign nongrantor trust, the amount of such loan will be treated as a distribution to the U.S. grantor or U.S. beneficiary, unless the obligation issued by the U.S. grantor, U.S. beneficiary, or U.S. person related to the U.S. grantor or U.S. beneficiary, in exchange for the loan is a qualified obligation. For this purpose, a loan by an unrelated third party that is guaranteed by a foreign trust is generally treated as a loan from the trust. See section V(A) of Notice 97-34, 1997-25 I.R.B. 22.

  After March 18, 2010, if a U.S. grantor, a U.S. beneficiary, or any U.S. person related to the U.S. grantor or U.S. beneficiary, directly or indirectly, use(s) any property of a foreign nongrantor trust, and the U.S. grantor, U.S. beneficiary, or U.S. person related to the U.S. grantor or the U.S. beneficiary, does not compensate such trust at FMV for the use of such property within a reasonable period of time, the FMV of such use will be treated as a distribution by the foreign nongrantor trust to the U.S. grantor or the U.S. beneficiary, as the case may be.

Foreign Trust and Domestic Trust

A foreign trust is any trust other than a domestic trust.

A domestic trust is any trust if:

  1. A court within the United States is able to exercise primary supervision over the administration of the trust; and

  2. One or more U.S. persons have the authority to control all substantial decisions of the trust.

Grantor

A grantor includes any person who creates a trust or directly or indirectly makes a gratuitous transfer of cash or other property to a trust. A grantor includes any person treated as the owner of any part of a foreign trust's assets under sections 671 through 679, excluding section 678.

Note.

If a partnership or corporation makes a gratuitous transfer to a trust, the partners or shareholders are generally treated as the grantors of the trust, unless the partnership or corporation made the transfer for a business purpose of the partnership or corporation.

If a trust makes a gratuitous transfer to another trust, the grantor of the transferor trust is treated as the grantor of the transferee trust, except that if a person with a general power of appointment over the transferor trust exercises that power in favor of another trust, such person is treated as the grantor of the transferee trust, even if the grantor of the transferor trust is treated as the owner of the transferor trust.

Grantor Trust

A grantor trust is any trust to the extent that the assets of the trust are treated as owned by a person other than the trust. See the grantor trust rules in sections 671 through 679. A part of the trust may be treated as a grantor trust to the extent that only a portion of the trust assets are owned by a person other than the trust.

Gratuitous Transfer

A gratuitous transfer to a foreign trust is any transfer to the trust other than (a) a transfer for FMV or (b) a distribution to the trust with respect to an interest held by the trust (i) in an entity other than a trust (e.g., a corporation or a partnership) or (ii) in an investment trust described in Regulations section 301.7701-4(c), a liquidating trust described in Regulations section 301.7701-4(d), or an environmental remediation trust described in Regulations section 301.7701-4(e).

A transfer of property to a trust may be considered a gratuitous transfer without regard to whether the transfer is a gift for gift tax purposes. See Chapter 12 of Subtitle B of the Code (i.e., sections 2501 through 2524).

For purposes of this determination, if a U.S. person contributes property to a trust in exchange for any type of interest in the trust, such interest in the trust will be disregarded in determining whether FMV has been received. In addition, a U.S. person will not be treated as making a transfer for FMV merely because the transferor is deemed to recognize gain on the transaction.

If you transfer property to a foreign trust in exchange for an obligation of the trust (or an obligation of a person related to the trust), it will be a gratuitous transfer unless the obligation is a qualified obligation. Obligation and qualified obligation are defined later.

Gross Reportable Amount

Gross reportable amount is:

  • The gross value of property involved in the creation of a foreign trust or the transfer of property to a foreign trust (including a transfer by reason of death);

  • The gross value of any portion of a foreign trust treated as owned by a U.S. person under the rules of sections 671 through 679 or any part of a foreign trust that is included in the gross estate of a U.S. citizen or resident;

  • The gross value of the assets in a trust at the time the trust becomes a foreign trust, if the trust was a domestic trust to which a U.S. citizen or resident had previously transferred property, and provided that such U.S. citizen or resident is alive at the time the trust becomes a foreign trust (see section 679(a)(5)); or

  • The gross amount of distributions received from a foreign trust.

Gross Value

Gross value is the FMV of property as determined under section 2031 and its regulations as if the owner had died on the valuation date. Although formal appraisals are not generally required, you should keep contemporaneous records of how you arrived at your good faith estimate.

Guarantee

A guarantee:

  • Includes any arrangement under which a person, directly or indirectly, assures, on a conditional or unconditional basis, the payment of another's obligation;

  • Encompasses any form of credit support, and includes a commitment to make a capital contribution to the debtor or otherwise maintain its financial viability; or

  • Includes an arrangement reflected in a “comfort letter,” regardless of whether the arrangement gives rise to a legally enforceable obligation. If an arrangement is contingent upon the occurrence of an event, in determining whether the arrangement is a guarantee, you must assume that the event has occurred.

Nongrantor Trust

A nongrantor trust is any trust to the extent that the assets of the trust are not treated as owned by a person other than the trust. Thus, a nongrantor trust is treated as a taxable entity. A trust may be treated as a nongrantor trust with respect to only a portion of the trust assets. See Grantor Trust, earlier.

Obligation

An obligation includes any bond, note, debenture, certificate, bill receivable, account receivable, note receivable, open account, or other evidence of indebtedness, and, to the extent not previously described, any annuity contract.

Owner

An owner of a foreign trust is the person that is treated as owning any of the assets of a foreign trust under the rules of sections 671 through 679.

Property

Property means any property, whether tangible or intangible, including cash.

Qualified Obligation

A qualified obligation, for purposes of this form, is any obligation only if:

  1. The obligation is reduced to writing by an express written agreement;

  2. The term of the obligation does not exceed 5 years (including options to renew and rollovers) and it is repaid within the 5-year term;

  3. All payments on the obligation are denominated in U.S. dollars;

  4. The yield to maturity of the obligation is not less than 100% of the applicable federal rate under section 1274(d) for the day on which the obligation is issued and not greater than 130% of the applicable federal rate;

  5. The U.S. person agrees to extend the period for assessment of any income or transfer tax attributable to the transfer and any consequential income tax changes for each year that the obligation is outstanding, to a date not earlier than 3 years after the maturity date of the obligation, unless the maturity date of the obligation does not extend beyond the end of the U.S. person's tax year and is paid within such period (this is done on Part I, Schedule A, line 12, and Part III, line 26, as applicable); and

  6. The U.S. person reports the status of the obligation, including principal and interest payments, on Part I, Schedule C, line 19, and Part III, line 28, as applicable, for each year that the obligation is outstanding.

Related Person

A related person generally includes any person who is related to you for purposes of section 267 and 707(b). This includes, but is not limited to:

  • A member of your family—your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), lineal descendants (children, grandchildren, etc.), and the spouses of any of these persons.

  • A corporation in which you, directly or indirectly, own more than 50% in value of the outstanding stock.

See section 643(i)(2)(B) and the regulations under sections 267 and 707(b).

Person related to a foreign trust.   A person is related to a foreign trust if such person, without regard to the transfer at issue, is a grantor of the trust, a beneficiary of the trust, or is related to any grantor or beneficiary of the trust. See the definition of related person above.

Reportable Event

A reportable event includes:

  1. The creation of a foreign trust by a U.S. person.

  2. The transfer of any money or property, directly or indirectly, to a foreign trust by a U.S. person, including a transfer by reason of death. This includes transfers that are deemed to have occurred under sections 679(a)(4) and (5).

  3. The death of a citizen or resident of the United States if:

    • The decedent was treated as the owner of any portion of a foreign trust under the rules of sections 671 through 679, or

    • Any portion of a foreign trust was included in the gross estate of the decedent.

Responsible Party

Responsible party means:

  • The grantor in the case of the creation of an inter vivos trust,

  • The transferor, in the case of a reportable event (defined above) other than a transfer by reason of death, or

  • The executor of the decedent's estate in any other case (whether or not the executor is a U.S. person).

U.S. Agent

A U.S. agent is a U.S. person (defined later) that has a binding contract with a foreign trust that allows the U.S. person to act as the trust's authorized U.S. agent in applying sections 7602, 7603, and 7604 with respect to:

  • Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed, or required to be taken into account under the rules of sections 671 through 679, with respect to a foreign trust; or

  • Any summons by the IRS for such records or testimony.

A U.S. grantor, a U.S. beneficiary, or a domestic corporation controlled by the grantor or beneficiary may act as a U.S. agent. However, you may not treat the foreign trust as having a U.S. agent unless you enter the name, address, and taxpayer identification number of the U.S. agent on lines 3a through 3g on page 1 of the form. See Identification numbers, later.

If the person identified as the U.S. agent does not produce records or testimony when requested or summoned by the IRS, the IRS may redetermine the tax consequences of your transactions with the trust and impose appropriate penalties under section 6677.

The agency relationship must be established by the time the U.S. person files Form 3520 for the relevant tax year and must continue as long as the statute of limitations remains open for the relevant tax year. If the agent's responsibility as an agent of the trust is terminated for any reason (e.g., agent's resignation, agent's liquidation, or agent's death), see section IV(B) of Notice 97-34.

In order to authorize a U.S. person to act as an agent for purposes of section 6048(b)(2) or for purposes of section 6048(c)(2)(A), the trust and the agent must enter into a binding agreement substantially in the format reflected under AUTHORIZATION OF AGENT in the Instructions for Form 3520-A, amended as required.

U.S. Beneficiary

A U.S. beneficiary generally includes any U.S. person that could possibly benefit (directly or indirectly) from the trust (including an amended trust) at any time, whether or not the person is named in the trust instrument as a beneficiary and whether or not the person can receive a distribution from the trust in the current year. In addition, a U.S. beneficiary includes:

  • A foreign corporation that is a controlled foreign corporation (as defined in section 957(a)),

  • A foreign partnership if a U.S. person is a partner of the partnership, and

  • A foreign estate or trust if the estate or trust has a U.S. beneficiary.

Foreign trust treated as having a U.S. beneficiary.   In general, a foreign trust will be treated as having a U.S. beneficiary unless the terms of the trust instrument specifically prohibit any distribution of income or corpus to a U.S. person at any time, even after the death of the U.S. transferor or any event terminating the trust, and the trust cannot be amended or revised to allow such a distribution. For these purposes, an amount will be treated as accumulated for the benefit of a U.S. person even if the U.S. person's interest in the trust is contingent on a future event and regardless of whether anything is actually distributed to a U.S. person during that tax year.

Special rule in case of discretion to identify beneficiaries.

For purposes of the general rule described earlier, if any person has the discretion of making a distribution from the trust to, or for the benefit of, any person, the trust will be treated as having a beneficiary who is a U.S. person unless the terms of the trust specifically identify the class of persons to whom such distributions may be made, and none of those persons are U.S. persons during the tax year.

Certain agreements and understandings treated as terms of the trust.

For purposes of the general rule described earlier, if any U.S. person who directly or indirectly transfers property to the trust is directly or indirectly involved in any agreement or understanding (whether written, oral, or otherwise) that may result in the income or corpus of the trust being paid or accumulated to or for the benefit of a U.S. person, such agreement or understanding will be treated as a term of the trust.

Certain loans or uncompensated use of trust property.

If a foreign trust is not already treated as having a U.S. beneficiary under the rules described earlier and above, the trust will be treated as having a U.S. beneficiary if, after March 18, 2010, either:

  • The foreign trust loans cash or marketable securities directly or indirectly to a U.S. person and the U.S. person does not repay the loan at a market rate of interest within a reasonable period of time, or

  • A U.S. person, directly or indirectly, uses property that is owned by the foreign trust and does not pay FMV of the use of such property within a reasonable period of time.

Presumption that foreign trust has U.S. beneficiary.   For transfers of property after March 18, 2010, if a U.S. person directly or indirectly transfers property to a foreign trust (other than a deferred compensation or charitable trust described in section 6048(a)(3)(B)(ii)), the IRS may treat such trust as having a U.S. beneficiary for purposes of applying section 679(d) to such transfer if the IRS requests information with respect to the transfer and the U.S. person fails to demonstrate to the satisfaction of the IRS that no portion of the income or corpus of the trust may ever be paid to or accumulated for the benefit of a U.S. person.

U.S. Person

A U.S. person is:

  • A citizen or resident alien of the United States (see Pub. 519, U.S. Tax Guide for Aliens, for guidance on determining resident alien status),

  • A domestic partnership,

  • A domestic corporation,

  • Any estate (other than a foreign estate, within the meaning of section 7701(a)(31)(A)), and

  • Any domestic trust (defined earlier).

U.S. Transferor

A U.S. transferor is any U.S. person who:

  1. Creates or settles a foreign trust.

  2. Directly or indirectly transfers money or property to a foreign trust. This includes deemed transfers under section 679(a)(4) or section 679(a)(5).

  3. Makes a sale to a foreign trust if the sale was at other than arm's-length terms or was to a related foreign trust, or makes (or guarantees) a loan to a related foreign trust.

  4. Is the executor of the estate of a U.S. person and:

    1. The decedent made a testamentary transfer (a transfer by reason of death) to a foreign trust,

    2. Immediately prior to death, the decedent was treated as the owner of any portion of a foreign trust under the rules of sections 671 through 679, or

    3. Any portion of a foreign trust's assets were included in the estate of the decedent.

Generally, the person defined as the transferor is the responsible party (defined earlier) who must ensure that required information be provided or pay appropriate penalties.


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