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What is a 3520 and who needs to file one

Form 3520 is ‘Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.’

You need to file form 3520 if any one or more of the following apply:

  1. you are the responsible party or you are a US Person who transferred property to a foreign trust in exchange for an obligation.  Property means any property, whether tangible or intangible and includes cash.  An obligation includes any obligation that is not a qualified obligation.  A qualified obligation is any obligation that has been reduced to writing, where the term does not exceed 5 years, that is denominated in US dollars, and where the yield to maturity Is not less than 100% of the applicable federal rate.
  2. you are a US 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 to 679.  These rules are the grantor trust rules.  A grantor includes any person who creates a trust or directly or indirectly makes a gratuitous transfer of cash or other property to the trust.
  3. you are a US Person (including a US owner) who received (directly or indirectly) a distribution from a foreign trust during the current tax year or you are a US Person who is a US owner or beneficiary of a foreign trust and such foreign trust made a loan of cash or marketable securities to you or a US Person related to you or a US Person related to you with uncompensated use of trust property.
  4. you are a US Person who, during the current tax year received either:
    • More than $100,000 from a non resident alien individual or a foreign estate that you treat as gifts or bequests; or
    • More than $16,076 from foreign corporations or foreign partnerships that you treated as gifts.

Penalties

A penalty applies for 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 the following:

  • 35% of the gross value of any property transferred to a foreign trust for failure by a US transferor to report the creation of or transfer to report the creation of or transfer to a foreign trust in Part 1.
  • 35% of the gross value of the distributions received from a foreign trust for failure by a US transferor to report the creation of or transfer to a foreign trust in Part 1.
  • 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a US Person under the grantor trust rules for failure to report the US owner information in Part II.