Form 3520-A, Foreign Trust Return with US Owner Explained

By: Sean M. Golding1

Foreign Trust Information Return with US Owner

There are many different types of international information reporting forms that a US Person may have to file when they have ownership over foreign accounts, assets, investments, entities, and trusts. For the US Owner of a Foreign Trust, one of the main forms (but not only form) they have to file is Form 3520-A. Form 3520-A is the Annual Information Return of Foreign Trust with a U.S. Owner (under section 6048(b)). The form is one of the more complicated reporting vehicles for overseas assets. That is because unlike the FBAR or Form 8938 (FATCA), which focuses more on just reporting the high-balance and associated income,

Form 3520-A is a tax return for the trust – similar in concept to IRS Form 1041 – and therefore it has several moving parts associated with the annual foreign trust reporting requirements.

Is It a Foreign Trust?

The first and most important aspect of foreign trust reporting is to determine whether or not you even have a foreign trust in the first place – which can be harder than it seems. Different countries have different rules and requirements as to what qualifies as a trust. For example, in some countries, a person may use a structure such as a Sociedad Anonima for asset protection — and while it was created for trust-like purposes — from a US tax perspective, it may be considered a corporation and not a trust and require different reporting on Form 5471. Likewise, a Stiftung that is not considered a foreign trust per se, can be deemed a foreign trust for US tax and reporting purposes.

26 USC 6048(b)

The starting point with foreign trust reporting, as with any type of international information reporting, should determine what the statute is and what corresponding IRS form(s) must be filed. Which foreign trust reporting, taxpayers should refer to Internal Revenue Code section 6048. The code section breaks down who is required to report, what is required to be included in the reporting form, and what happens when taxpayers fail to report timely.

• (b) United States owner of foreign trust

o (1) In general

• If, at any time during any taxable year of a United States person, such person is treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, such person shall submit such information as the Secretary may prescribe with respect to such trust for such year and shall be responsible to ensure that—

• (A) such trust makes a return for such year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe, and

• (B) such trust furnishes such information as the Secretary may prescribe to each United States person

• (i) who is treated as the owner of any portion of such trust or

• (ii) who receives (directly or indirectly) any distribution from the trust. (2)Trusts not having United States agent

• (A) In general

• If the rules of this paragraph apply to any foreign trust, the determination of amounts required to be taken into account with respect to such trust by a United States person under the rules of subpart E of part I of subchapter J of chapter 1 shall be determined by the Secretary.

• (B) United States agent required

• The rules of this paragraph shall apply to any foreign trust to which paragraph (1) applies unless such trust agrees (in such manner, subject to such conditions, and at such time as the Secretary shall prescribe) to authorize a United States person to act as such trust’s limited agent solely for purposes of applying sections 7602, 7603, and 7604 with respect to—

• (i) any request by the Secretary to examine records or produce testimony related to the proper treatment of amounts required to be taken into account under the rules referred to in subparagraph (A), or

• (ii) any summons by the Secretary for such records or testimony. The appearance of persons or production of records by reason of a United States person being such an agent shall not subject such persons or records to legal process for any purpose other than determining the correct treatment under this title of the amounts required to be taken into account under the rules referred to in subparagraph (A). A foreign trust which appoints an agent described in this subparagraph shall not be considered to have an office or a permanent establishment in the United States, or to be engaged in a trade or business in the United States, solely because of the activities of such agent pursuant to this subsection.

• (C) Other rules to apply

• Rules similar to the rules of paragraphs (2) and (4) of section 6038A(e) shall apply for purposes of this paragraph.

IRS Form 1041

By way of comparison, for a US-based trust, taxpayers file Form 1041 instead of Form 3520-A. Depending on the complexity of an estate plan, there may be some overlap so taxpayers should be aware of whether or not their trust is actually a US trust or a foreign trust. Oftentimes, nuances within the trust language can take what looks like a US-based trust and transmute it into a foreign trust.

Form 3520-A Breakdown

Let’s go through the basics of the Form 3520-A content to get a baseline understanding of the type of information that needs to be reported:

General Information (Part I)

As with most international information reporting forms, the first part of Form 3520-A refers to general information about the name of the trust, the location of the trust, and the day that the trust is formed. There is also additional information about whether or not a US agent was appointed. Oftentimes having a US agent is a benefit to a foreign trust because it can minimize the amount of reporting and documentation that needs to be provided to the IRS.

Foreign Trust Income Statement (Part II)

The next portion of the reporting involves the foreign trust income statement. This is where taxpayers will have to roll up their sleeves and dive into the more complex aspect of foreign trust reported. Depending on the type of foreign trust and whether this information is even available, taxpayers must do their best to provide information about the income generated in the foreign trust. As you can see from the form, the usual cast of income characters is included – such as interest, dividends, rent, gains, and other income. In addition, the taxpayer must also provide information regarding expenses and other distributions from the trust.

Foreign Trust Balance Sheet (Part III)

The third part of Form 3520-A is the balance sheet. This is important, to show that the assets equal liabilities plus equity. Again, depending on how much information is actually available from the foreign trust will dictate how thorough the taxpayer is when preparing this form. One very important concept to keep in mind is the idea of diligence. Completing Form 3520-A — or any other international information reporting form for that matter — is not a test and you are not graded on the outcome. The idea is to do a diligent and reasonable search sufficient to obtain as much information you can to prepare the form as accurately as possible so that if the IRS was ever to come knocking on your door, you can explain what you did to try to obtain the information to the best of your abilities.

Additional Form 3520-A Forms

In addition to completing the main Form 3520-A, there are also other ancillary forms that taxpayers may have to file depending on what their relationship is to the trust, the type of trust (grantor versus non-grantor), and other related issues. Let’s take a look at some of these other forms.

Foreign Grantor Trust Owner Statement

When a taxpayer is a grantor of a foreign trust, they are required to complete an additional form submitted with Form 3520-A referred to as a Foreign Grantor Trust Owner Statement. The form requires each US person owner of the trust to prepare their own statement unless the trustee already prepared a statement for them. They must identify information regarding the trust: if an agent was appointed, the portion of the trust deemed owned by the specific US person, and how much cash or other fair market value property was distributed to the owner.

Foreign Grantor Trust Beneficiary Statement

The trustee or the owner must also prepare a separate statement for each specific US beneficiary that had received a distribution from the trust. This form is similar to the foreign grantor trust owner statement, aside from the fact that it does not require as detailed an income breakdown that it does for the owner.

Exceptions to Filing Form 3520-A

Some taxpayers may be able to sidestep or circumvent the reporting requirements on Form 3520-A. The two main exceptions involve Revenue Procedure 2020–17 and Revenue Procedure 2014–55.

Revenue Procedure 2020-17

Revenue Procedure 2020–17 refers specifically to pension and other tax-deferred retirement and non-retirement savings. In reality, the IRS is not really seeking taxpayers who have an ownership interest in foreign pension plans or other deferred investments (that may technically qualify as a trust) to report the asset on Form 3520-A. Especially since these types of accounts are usually already reported on FATCA Form 8938 and the FBAR – and the IRS is seeking to minimize the heavy burden of duplicative reporting when possible.

Revenue Procedure 2014-55

Revenue Procedure 2014-55 deals specifically with RRSPs and RRIFs from Canada and specifically exempts these two types of retirement savings from having to be reported on Form 3520 or 3520-A as a foreign trust.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs. Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain Streamlined Procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Endnotes

1. Golding & Golding, International Tax Lawyers - Sean M. Golding

eReport Winter 2023