IRS Form 3520 is the annual information return a U.S. person files to report transfers to a foreign trust, ownership of a foreign trust, distributions from a foreign trust, or large gifts and bequests from foreign individuals or entities. It reports information; it does not itself calculate tax. But missing it is expensive: penalties start at $10,000 or a percentage of the transaction value, whichever is greater, and they apply even if no tax was owed on the underlying transaction.
When You Have to File
A “U.S. person” for these purposes includes citizens, resident aliens, domestic corporations, domestic partnerships, and domestic estates or trusts. The executor of a deceased U.S. person’s estate can also inherit a filing obligation.1Internal Revenue Service. Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
Four situations trigger a filing:
- You transferred money or property to a foreign trust, or created one. Both direct and indirect transfers count, and there is no dollar threshold.2Office of the Law Revision Counsel. 26 USC 6048 – Information With Respect to Certain Foreign Trusts
- You are treated as the owner of any portion of a foreign trust under the grantor trust rules. You must include the trust’s income, deductions, and credits on your own return.3Office of the Law Revision Counsel. 26 US Code 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
- You received a distribution from a foreign trust, directly or indirectly. Distribution is defined broadly to include cash, property, loans of cash or marketable securities, and even rent-free use of trust property.4Internal Revenue Service. Instructions for Form 3520
- You received gifts or bequests from foreign persons above the reporting thresholds.
The gift thresholds differ based on the source. Gifts and bequests from a nonresident alien individual or a foreign estate must be reported once the total from that source exceeds $100,000 for the year. Once you cross that line, each individual gift over $5,000 must be identified separately.5Internal Revenue Service. Gifts From Foreign Person A much lower threshold applies to gifts from foreign corporations and partnerships: the combined total from all such entities must be reported once it exceeds an inflation-adjusted figure, set at $20,573 for the 2026 tax year.
Foreign gifts themselves are generally not taxable income. But if you fail to report one and the IRS discovers it later, the agency has authority to determine the tax consequences of the receipt, and unreported amounts can be recharacterized as distributions from a foreign trust subject to the punitive accumulation tax.6Office of the Law Revision Counsel. 26 USC 6039F – Notice of Large Gifts Received From Foreign Persons The IRS is also skeptical of purported “gifts” from business entities and may treat them as taxable compensation or disguised distributions.
Deadline and Where to Send It
Form 3520 is due on the 15th day of the fourth month after the end of your tax year. For calendar-year filers, that is April 15. An extension of your income tax return automatically extends Form 3520 to the 15th day of the tenth month — October 15 for calendar-year filers — with no separate extension request required.7Internal Revenue Service. Reminder to U.S. Owners of a Foreign Trust
Do not attach Form 3520 to your income tax return. It is mailed separately to the IRS Service Center in Ogden, Utah.8Internal Revenue Service. Where to File Forms Beginning With the Number 3 This trips up a lot of filers. The form goes in with the 1040, the 1040 gets processed, and Ogden never receives Form 3520. The penalty notice arrives months later, and the IRS treats the form as unfiled.
Special Rules for Foreign Trust Distributions
Distributions from a foreign grantor trust are relatively simple because the grantor is already taxed on the trust’s income. Distributions from a foreign non-grantor trust are where things get expensive.
When a foreign non-grantor trust accumulates income rather than distributing it currently, later distributions of that accumulated income are subject to the throwback rule. The tax is computed by allocating the accumulation distribution across prior years using an averaging method, then adding an interest charge that, for accumulation periods beginning in 1996 or later, compounds daily at the same rate the IRS uses for underpaid taxes.9Office of the Law Revision Counsel. 26 US Code 667 – Treatment of Amounts Deemed Distributed by Trust in Preceding Years10Office of the Law Revision Counsel. 26 US Code 668 – Interest Charge on Accumulation Distributions Capital gains lose their favorable rate and are taxed as ordinary income through this mechanism.
You can escape the default punitive calculation if you obtain a Foreign Non-Grantor Trust Beneficiary Statement from the trustee and use it to report the distribution based on the trust’s actual income character and amounts.11Internal Revenue Service. Foreign Trust Reporting Requirements and Tax Consequences Without it, the IRS applies default assumptions that treat the whole distribution as an accumulation distribution. Get the statement from the trustee. It is one of the single most valuable steps a U.S. beneficiary can take, and it is one of the most commonly skipped.
When U.S. Owners Must Also Deal With Form 3520-A
If you are treated as the U.S. owner of a foreign trust, the trust itself is expected to file its own annual information return, Form 3520-A, and to provide beneficiary statements to every U.S. owner and every U.S. person who received a distribution. If the foreign trustee doesn’t file Form 3520-A, the U.S. owner is responsible for filing a substitute Form 3520-A and attaching it to their own Form 3520. Failing to do either generates separate penalties.12Internal Revenue Service. Instructions for Form 3520-A
A foreign trustee often has no interest in filing a U.S. tax form and no obligation under local law to do so. The IRS holds the U.S. owner responsible regardless. If the trustee won’t cooperate, filing the substitute yourself is the only way to avoid the penalty.
Foreign Retirement Plans That Are Exempt
Revenue Procedure 2020-17 exempts certain tax-favored foreign retirement trusts from the Form 3520 and 3520-A reporting requirements. This matters most to Americans abroad who participate in their host country’s retirement system.
To qualify, a foreign retirement trust must operate exclusively or almost exclusively to provide retirement benefits, receive favorable tax treatment in the country where it is established, be subject to annual information reporting to that country’s tax authorities, accept only contributions from earned income, and cap contributions at reasonable amounts (no more than $50,000 annually or $1,000,000 over a lifetime). Employer plans must also cover a broad range of employees on a nondiscriminatory basis. A similar exemption applies to certain foreign non-retirement savings trusts for medical, disability, or educational benefits. Canadian RRSPs and RRIFs were already exempt under earlier guidance that remains in effect.13Internal Revenue Service. Revenue Procedure 2020-17
The exemption is narrow in one important respect: it covers Form 3520 and 3520-A only. Form 8938 and FBAR obligations for the same account are not affected. Form 8938 is required when your specified foreign financial assets exceed thresholds that start at $50,000 for unmarried filers in the U.S. and rise for joint filers and taxpayers living abroad, and an interest in a foreign trust counts as a specified foreign financial asset.14Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets? The FBAR (FinCEN Form 114) is filed with the Financial Crimes Enforcement Network, not the IRS, whenever your aggregate foreign account balances exceed $10,000 at any point during the year.15Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) Filing one of these three forms does not excuse the others.
Penalties for Missing or Late Filing
Penalties are assessed separately for each type of reportable transaction. If you have obligations under multiple parts of the form, the penalties stack.
- Transfers to a foreign trust (Part I): the greater of $10,000 or 35% of the gross value of property transferred.
- U.S. owner’s failure to ensure the trust files Form 3520-A (Part II): the greater of $10,000 or 5% of the gross value of trust assets treated as owned by the U.S. person.
- Distributions from a foreign trust (Part III): the greater of $10,000 or 35% of the gross value of the distribution.
- Foreign gifts and bequests (Part IV): 5% of the gift amount per month the failure continues, capped at 25%.6Office of the Law Revision Counsel. 26 USC 6039F – Notice of Large Gifts Received From Foreign Persons
After the IRS sends notice of a failure to file, an additional $10,000 penalty runs for each 30-day period the failure continues.5Internal Revenue Service. Gifts From Foreign Person These continuing charges can quickly exceed the initial penalty.
The only defense is reasonable cause: a showing that the failure resulted from ordinary business care and prudence, not willful neglect. Simply not knowing about the requirement does not qualify. The statute also states directly that foreign secrecy or disclosure laws are not reasonable cause, a provision aimed at the most common excuse.16Office of the Law Revision Counsel. 26 USC 6677 – Failure to File Information With Respect to Certain Foreign Trusts
Fixing a Missed Filing
If you should have been filing and haven’t been, two formal programs exist to bring you current, ideally before the IRS finds you.
The Delinquent International Information Return Submission Procedures apply if you are not under examination or criminal investigation and haven’t been contacted by the IRS about the missing returns. You file the late Form 3520 or 3520-A using the standard instructions and attach a reasonable cause statement explaining why each return is late. Be prepared for the IRS to assess penalties during processing without first reviewing your reasonable cause explanation; you may have to respond to follow-up correspondence and resubmit your reasoning.17Internal Revenue Service. Delinquent International Information Return Submission Procedures
The Streamlined Filing Compliance Procedures are for taxpayers whose failure to file was non-willful, meaning it resulted from negligence, inadvertence, mistake, or a good faith misunderstanding of the law. Separate tracks exist for taxpayers living abroad and taxpayers living in the United States, and both require certifying non-willfulness under penalty of perjury. You cannot use streamlined procedures if the IRS is already examining any of your returns or if you are under criminal investigation. Streamlined submissions don’t produce a closing agreement and aren’t automatically audited, though normal audit selection still applies. If you already tried a “quiet disclosure” through amended returns outside a program, you can still use streamlined procedures going forward, but penalties already assessed on the earlier filings will not be reversed.18Internal Revenue Service. Streamlined Filing Compliance Procedures