IRS Posts Lists of Foreign Trust Reporting Requirements and Tax Consequences

On its website, the IRS has provided foreign trusts, and U.S. owners of such trusts, with a summary of their existing information reporting requirements. 

The IRS notes that failure to satisfy these information reporting requirements can result in significant penalties.  

A U.S. owner of a foreign trust is required to file Form 3520 when the U.S. owner:

• Creates a foreign trust, transfers money or property to a foreign trust, or makes a loan to a foreign trust; 

• Receives distributions from a foreign trust;

• Receives the uncompensated use of property belonging to a foreign trust; 

• Receives a loan from a foreign trust; or 

• Is treated as a “trust owner” under the grantor trust rules (Code Sec. 671 - Code Sec. 679).

Generally, Form 3520 is due by the 15th day of the fourth month following the end of the U.S. person’s tax year (April 15 for calendar year taxpayers). This due date can be extended. If the U.S. person requests an extension to file their income tax return, the U.S. person should be sure to check Form 3520, Box 1k, and enter the form number of their income tax return to avoid a late filing penalty for Form 3520.

A foreign trust with a U.S. owner is required to file Form 3520-A. However, a U.S. owner of a foreign trust should ensure that the foreign trust timely files a complete and accurate Form 3520-A and furnishes the required annual statement to the foreign trust’s U.S. owner to avoid penalties for the foreign trust’s failure to timely file a Form 3520-A.

If a foreign trust fails to file a Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (April 15 for calendar year taxpayers) in order to avoid being subject to a penalty for the foreign trust’s failure to file a Form 3520-A.  

Generally, Form 3520-A is due by the 15th day of the 3rd month (March 15 for calendar year taxpayers) after the end of the trust’s tax year. Taxpayers can get an automatic 6-month extension to file Form 3520-A by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns. Form 7004, like Form 3520-A, must be filed under the foreign trust’s EIN. 

Also, each year a U.S. person who is the beneficiary of a foreign grantor trust should receive, from the foreign trust, a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, page 5). A U.S. person who is the beneficiary of a foreign nongrantor trust should receive a Foreign Nongrantor Trust Beneficiary Statement, which will include information about the taxability of the distributions the beneficiary received.

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