Form 3520

Form 3520 

Form 3520 & Instructions: The IRS Form 3520 is used to report a foreign gift, inheritance or trust distribution from a foreign person. It does not have to be a “Foreign Gift.” Rather, if a foreign person gifts U.S. property – there may be a Form 3520 reporting requirement as well.  The Form 3520 complexity is on a sliding scale. On one end of the spectrum, reporting a cash gift from an individual person is not very complex. On the other end of the spectrum, when foreign trusts are involved, the reporting becomes much more complicated. The IRS has significantly increased the issuance of offshore penalties regarding non-compliance with Form 3520. In general, the Internal Revenue Service takes an aggressive position on matters involving foreign accounts compliance and unreported offshore income.

Let’s review the basics of filing form 3520:

Who Files Form 3520?

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

• • • You are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding.

    • Responsible party, reportable event, qualified obligation, and person related to a foreign trust 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.

    • 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. If you receive distributions from the foreign trust, you may also need to complete lines 15 through 18 of Part I if you answered “No” to line 3, and Part III. See the instructions for Parts I and III. U.S. person and owner are defined later.

Exceptions To Filing Form 3520

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

• • • Transfers to foreign trusts described in section 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 (for example, 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), a Canadian registered retirement income fund (RRIF), or any other Canadian retirement plan that is within the meaning of section 3 of Rev. Proc. 2014-55. See Rev. Proc. 2014-55, 2014-44 I.R.B. 753, available at IRS.gov/irb/2014-44_IRB/ar10.html.

    • Deemed transfers from 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).

    • 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).

When and Where To File the Form 3520

• • • In general, a U.S. person’s Form 3520 is due on the 15th day of the 4th month following the end of such person’s tax year for income tax purposes, which, for individuals, is April 15. If, however, on the due date of your income tax return, you are a U.S. citizen or resident who qualifies for one of the following conditions, then your Form 3520 is due on the 15th day of the 6th month (June 15) following the end of your tax year for income tax purposes. You must include a statement on the Form 3520 showing that you are a U.S. citizen or resident who meets one of these conditions.

    • You live outside of the United States and Puerto Rico and your place of business or post of duty is outside the United States and Puerto Rico.

    • You are in the military or naval service on duty outside the United States and Puerto Rico.

    • In the case of a Form 3520 filed with respect to a U.S. decedent, the due date to file a Form 3520 is the 15th day of the 4th month following the end of the decedent’s last tax year for income tax purposes (April 15).

    • If the U.S. person’s estate is also required to file a Form 3520, the estate will have to file by the 15th day of the 4th month following the end of the estate’s tax year for income tax purposes, just like any other U.S. person. If the due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday.

    • Note. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year. 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).

    • Important Form 3520 Reporting Facts

Here are some of the key definitions to be aware of:

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. Note. Under the HIRE Act, effective after March 18, 2010, if a foreign trust directly or indirectly loans cash or marketable securities to a U.S. person who does not repay the loan at a market rate of interest, or allows a U.S. person to use trust property without paying FMV within a reasonable period of time, the trust will be treated as having a U.S. beneficiary and is therefore treated as a grantor trust under the grantor trust rules.

    • Reporting by U.S. owners receiving distributions from foreign grantor trust. If a U.S. owner (defined later) receives (directly or indirectly) a distribution from a foreign trust of which the U.S. person is treated as the owner, the U.S. owner must only complete lines 24 and 27 in Part III.

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 (for example, 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 gratuitous transfer includes any indirect transfer that is structured with a principal purpose of avoiding the application of section 679 or 6048.

    • 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 (that is, 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 related 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. Any transfer in exchange for an obligation (whether or not a qualified obligation) must be reported under section 6048(a). Obligation and qualified obligation are defined later. See section III.B of Notice 97-34, and the regulations under sections 679 and 684 for additional information.

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 or Amount

• • • For purposes of determining the gross reportable amount, the gross value or gross amount of property is the value of property as determined under section 2512 and its regulations, without regard to any prohibitions or restrictions on a person’s interest in the property. See section VII of Notice 97-34. 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 under the grantor trust rules in sections 671 through 679.

    • 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.

Related Person

A related person generally includes any person who is related to you for purposes of sections 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; or

    • 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.

Reportable Event

• • • A reportable event includes the following.

      • 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 (TIN) 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 amounts required to be taken into account with respect to the foreign trust by the U.S. owner. See section 6048(b)(2).

    • 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 (for example, 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. Attach a copy of the authorization to Form 3520.

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 designated 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. See Section II of Notice 97-34 and the regulations under section 679 for additional information.

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

• • • The decedent made a testamentary transfer (a transfer by reason of death) to a foreign trust;

    • 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

    • 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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