The IRS requested public comment regarding two reporting forms used by taxpayers in reporting for foreign gifts and trusts, Form 3520 and Form 3520-A.
The U.S. taxation and information reporting imposed on foreign trusts is complex.
Form 3520 is used by U.S. taxpayers when a reportable event occurs regarding a foreign trust or gift.
There are several events regarding foreign trusts that must be reported on a Form 3520. Reportable events include the creation of a foreign trust by a U.S. person (meaning a citizen, resident alien, or domestic partnership, corporation, or estate) or the transfer of money to a foreign trust by a U.S. person. Other reportable events include when a foreign trust is owned in whole or in part by a U.S. person, or if a U.S. person receives a distribution from a foreign trust.
Per the Instructions for Form 3520, gifts are reportable on the Form 3520 when a U.S. person receives a gift of more than $100,000 from a nonresident alien or foreign estate, or when more than $16,076 of gifts are received by a U.S. person from foreign corporations or partnerships.
Form 3520-A is an informational return that must be filed by all foreign trusts owned or partly owned by at least one U.S. person. This form would be filed in conjunction with a Form 3520. The purpose of the Form is to provide information about the trust, its U.S. beneficiaries, and any U.S. owner. Each U.S. owner is responsible for ensuring that the return is filed.
The IRS recently announced a campaign with a focus on the enforcement of filing requirements related to foreign trusts. Severe penalties may be imposed for noncompliance in connection with these two forms. Note that taxpayers may be subject to separate fines for each form that was not properly filed.
The complexity surrounding foreign trusts should be frequently reviewed to avoid tax implications and complications. Don’t hesititate to contact us if you have questions regarding the reporting of foreign trusts or gifts.
