What Are the Penalties for Failing to File Forms 3520 and 3520-A? (Part I)

 Posted on October 13, 2021 in Taxation Law

The U.S. Tax Code is complicated, and it is easy for taxpayers to make mistakes when filing tax forms or reporting their income and assets to the IRS. This is especially true for taxpayers with foreign assets or income. These taxpayers will need to meet multiple types of reporting requirements, and failure to do so can result in large penalties. A taxpayer who is the owner or beneficiary of a foreign trust will need to be sure to file Forms 3520 and/or 3520-A at the appropriate times, and if they fail to do so, they may face significant penalties.

A person may hold assets in a trust that is outside the jurisdiction of the United States. Since these types of trusts may sometimes be used in tax avoidance schemes, taxpayers are required to report certain types of transactions to ensure that income taxes and any other applicable taxes will be applied correctly. These requirements may apply to the owner or grantor of a foreign trust, a beneficiary who receives distributions from a foreign trust, and a trust itself.

Form 3520

U.S. citizens, domestic corporations or partnerships, estates, and trusts that are controlled by U.S. persons are required to file Form 3520 in the following situations:

• A U.S. person is considered the owner of a foreign trust.

• A foreign trust was created by a U.S. person.

• A U.S. person transferred assets or made a loan to a foreign trust.

• A U.S. person received distributions as the beneficiary of a foreign trust.

• A foreign trust made a loan to a U.S. person.

• A U.S. person received a gift or bequest of more than $100,000 from a foreign individual or estate or more than $16,649 from a foreign corporation or partnership.

Penalties may apply if a taxpayer fails to file Form 3520 on time or provides incorrect or incomplete information. The minimum penalty is $10,000, and the total penalty may be 35% of the value of assets transferred to a foreign trust or the distributions received from a foreign trust.

Form 3520-A

A U.S. taxpayer who is the owner of a foreign trust must ensure that the trust files Form 3520-A, which is an annual information return. Copies of this return must also be provided to U.S. persons who are owners or beneficiaries of the trust. If a trust does not file Form 3520-A, a U.S. owner must file this form at the same time as they file Form 3520. Failure to file Form 3520-A may result in a penalty of 5% of the value of the trust’s assets that are considered to be owned by a U.S. person, with a minimum penalty of $10,000.

Contact Our San Jose Tax Attorney for Foreign Trusts

If you are concerned about potential penalties for failing to file the proper forms as the owner or beneficiary of a foreign trust, John D. Teter Law Offices can help you understand how to address these issues. We will work with you to determine how you can avoid or minimize your potential penalties while addressing any other issues related to foreign tax compliance. Contact our San Jose, CA tax lawyer at 408-866-1810 to get help with tax-related issues.

Sources:

https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements-and-tax-consequences

https://www.irs.gov/instructions/i3520

https://www.irs.gov/instructions/i3520a