IRS Shifts Attention Towards Foreign Trust Reporting, Particularly Form 3520-A Reporting
For U.S. persons associated with foreign trusts, the filing of Form 3520-A is a crucial reporting obligation. This stand-alone information return is submitted directly to the IRS office in Ogden, Utah, and not with the income tax return.
Failing to file Form 3520-A can result in significant penalties. If the foreign trust does not file the form, the U.S. owner is responsible for submitting a substitute Form 3520-A to avoid penalties. The penalty for non-filing can be up to 5% of the trust's assets for each year the form is not filed.
In addition to the non-filing penalty, general penalties for international reporting failures can include significant fines and potential audits. It's important to note that the specific penalty for failing to file a substitute Form 3520-A by the U.S. owner is not detailed.
However, the IRS does not assess Form 3520-A penalties if a U.S. person demonstrates reasonable cause for non-compliance. Under the Delinquent International Information Return Submission Procedures (DIIRS), the IRS no longer assesses an automatic late-filing penalty, but reviews the reasonable cause determination to decide whether the penalty should be imposed.
For U.S. persons who missed a Form 3520-A filing deadline and do not qualify for the Streamlined Filing Compliance Procedures (SFCP), the DIIRS is an option. This process involves submitting the late Form 3520-A with a reasonable cause statement.
Taxpayers who do not qualify for the SFCP may consider the IRS' Voluntary Disclosure Program (VDP), which has higher penalties and a longer lookback period but reduces criminal risks.
If a U.S. person misses the filing deadline and fails to file the Form 3520-A within 90 days of an IRS notice, the IRS can impose continuation penalties. In such cases, the taxpayer may request review of the penalty determination with the IRS Independent Office of Appeals.
It's essential for U.S. persons involved with foreign trusts to be aware of other reporting requirements, such as Form 3520 for initial transfers or distributions, FinCEN Form 114 (FBAR) for foreign accounts, and Form 8938 for specified foreign financial assets. Maintaining detailed records of all trust activities is also crucial, as the IRS may request these at any time.
The IRS revised a public announcement regarding Form 3520-A on April 15, 2025. Given the complexity and potential penalties associated with non-compliance, consulting with a tax professional is advisable to ensure all necessary forms are filed correctly and on time. The statute of limitations for Form 3520-A penalties does not end until three years after a complete and accurate Form 3520-A has been filed. The IRS also allows both foreign trusts and U.S. persons to file for an extension of time to file Form 3520-A.
The failure to file Form 3520-A can incur significant penalties for U.S. persons associated with foreign trusts. These penalties can be up to 5% of the trust's assets for each year the form is not filed, and even though the IRS does not assess Form 3520-A penalties if a U.S. person demonstrates reasonable cause for non-compliance, the specific penalty for failing to file a substitute Form 3520-A remains undetailed in finance-related matters.
