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Knowledge Center Tax Forms
When certain foreign trust, foreign gift, or foreign bequest transactions occur, the IRS requires Form 3520 to be filed to report such transactions. Form 3520 is a US income tax return form used to report foreign financial assets and transactions. It’s not as simple as it sounds, though, because many different types of information must be reported on the form.
But don’t be intimidated: we’ve broken the information down into a simple guide for Americans living abroad – complete with Form 3520 examples!
Form 3520 is a tax form that US expats must file if they are owners of foreign trusts, make certain transactions with foreign trusts or receive large gifts or inheritances from certain overseas persons.
The following situations will trigger a requirement for Americans living abroad to file IRS Form 3520:
The IRS generally considers retirement plans to be trusts. Many foreign retirement plans are non-qualified plans, and can also be classified as foreign trusts subject to Form 3520 reporting
In many cases, the filing of Form 3520-A will go hand in hand with Form 3520. Form 3520-A is needed if a foreign trust exists with a US owner, and a US beneficiary receives a distribution from a foreign trust. The foreign trust must furnish the required annual statements; otherwise, the US owner or beneficiary must complete and attach Form 3520-A to its Form 3520.
Check out these examples to know how the requirements are triggered and more about Form 3520 instructions.
Alex, a US citizen, lives in Kansas with his parents. His grandfather (not a US citizen or resident) lives in Spain and wants to give Alex $15,000. His grandfather has a foreign grantor trust, and the trustee accordingly sends Alex $15,000 from the trust.
Alex, a US citizen, lives in Kansas with his parents. His grandfather (not a US citizen or resident) lives in Spain and wants to give Alex $15,000. The grandfather decides to write a check to Alex from his personal savings account held in Spain.
Marina, a US citizen, lives in Germany and opens a private pension plan. Marina makes all contributions to the plan; it is managed by a trustee who takes title to the property to conserve the funds for Marina, the beneficiary. The trust is protected from creditors. Upon analysis, the trust is deemed to qualify as a foreign grantor trust.
There are two exceptions to the requirement to file Form 3520-A in the following cases:
Penalties for failing to file Form 3520 as required can be quite severe.
The deadlines for these two forms are different! Form 3520 follows the regular schedule of IRS tax return deadlines and is due April 15th (April 18th, 2023), with expats receiving an automatic two-month extension through June 15th. Form 3520-A is due on March 15th, so this will be yet another deadline to tuck into your file of important expat tax information!
When it comes to reporting a trust on your US Tax Return, you must know the difference between a US trust and a foreign trust, as the reporting requirements differ for each.
The typical asset protection trust will be classified as a ‘grantor trust’ while the settlor is living. This means the grantor will report and pay all US taxes reported by the trust, including interest, dividends, and capital gains.
The IRS avoids using ‘offshore trust’ to differentiate these two, because ‘offshore’ could technically be a US or foreign trust – so the key difference between the two is in how you file them.
If the failure to report is due to reasonable cause and not due to willful neglect, the penalties above can be abated for foreign trust reporting. And on the positive side, both Forms 3520 and 3520-A are informational returns that typically don’t have taxes due with the filing of the forms. However, as we mentioned above, penalties can be significant for non-compliance.
Expat taxes can be complex, but we can help you file your Form 3520. Our team of tax professionals specializes in expat taxes, so we can ensure you rest easy. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.