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San Jose, CA tax penalty lawyerThe Internal Revenue Service is always on the lookout for taxpayers who fail to comply with tax laws, and it maintains a number of Large Business and International (LB&I) campaigns to address tax avoidance through unreported income or undisclosed assets. Foreign investments are an area that the IRS commonly examines, and one issue that has been highlighted is the holding of assets in trusts outside the United States. Failing to file the proper forms or making errors when reporting assets in foreign trusts can lead to tax audits and significant penalties.

Penalties for Errors in Form 3520 and 3520-A

There are a variety of reporting requirements that apply for U.S. citizens and companies or estates in the United States that are owners or beneficiaries of foreign trusts. The term “foreign trust” is broadly interpreted to include any trust that is not considered a domestic trust. Domestic trusts are trusts that are primarily controlled by people or entities in the United States and are supervised by a U.S. court. There is a lack of clarity concerning some financial accounts that may be treated by the IRS as a trust.

U.S. taxpayers who are considered the owner of a foreign trust or who engage in transactions with foreign trusts are required to file Form 3520 to report these transactions. These transactions may include creating a trust, transferring assets to a trust, receiving a distribution from a trust, or making or receiving a loan with a trust.

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San Jose tax compliance attorney for form 3520 and 3520-AThe more complex a person’s assets and debts, the more complex his or her tax return will typically be. Non-U.S. trusts and trusts involving gifts from people outside the United States require especially specific tax documentation. Taxpayers who fail to file the applicable tax documents or make errors on trust-related tax forms are subject to significant penalties imposed by the Internal Revenue Service (IRS). Determining which tax forms are needed and accurately completing these forms is increasingly time-consuming and stressful for many taxpayers. Fortunately, a qualified tax attorney can help. If you are required to file tax Form 3520 or 3520-A this tax season, it is crucial that you complete this paperwork promptly and accurately.

Form 3520 and 3520-A Errors Can Cost You

When reporting transactions with non-U.S. trusts, ownership of non-U.S. trusts subject to Internal Revenue Codes 671 - 679, or receipt of gifts from non-U.S. persons or businesses, you may need to file Form 3520. If you are the trustee of a foreign grantor trust with a grantor in the United States, you will likely be required to file Form 3520-A. Form 3520 is due by April 15. However if the taxpayer lives and works outside the United States, the deadline is June 15. Form 3520-A must be filed by March 15. Time extensions may be granted for qualifying applicants who take the appropriate steps.

If you are required to submit Form 3520 and the form is incomplete, inaccurate, or is not filed before the deadline, you will be subject to a penalty. The initial penalty is typically the greater of $10,000 or 35 percent of the value of the property added to the trust, 35 percent of the distributions received by the U.S. beneficiary, or 5 percent of the value of the trust assets owned by the U.S. grantor. Taxpayers may be subject to additional penalties and other consequences if the noncompliance continues after the IRS notifies the taxpayer of the compliance issue.

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