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When a particular foreign trust, foreign bequest transactions, or foreign gift takes place, the IRS needs form 3520 to be filed to report these transactions. 3520 Form is a US income tax return that is used to report foreign financial transactions and assets. It is not at all simple as it looks, though various types of data should be reported on the form.
But don’t worry, as we have broken down the details into easy steps for Americans staying overseas who have to complete form 3520 with examples.
Major Facts
- Several Americans who communicate with a foreign trust have to file a 3520 form.
- Many taxpayers who file 3520 files have to file 3520-A too.
- 3520 form is a tax form that is used to report specific transactions that involve foreign trusts.
Do you have to file IRS form 3520?
It is a tax form that US expats have to file if they are owners of foreign trusts, get huge gifts, make particular transactions with foreign trusts, or even inheritances from specific overseas individuals.
The following thing might trigger a need for Americans staying overseas to file form 3520 IRS:
- A foreign trust is established by a US individual.
- Money or property is transferred to a foreign trust by a US individual that includes
- Transfers applicable to a foreign grantor who later become a US individual under sec 679 (a)(4)
- Transfer by birth or death
- Transfer by US resident or citizen to trusts which were not initially foreign trusts but became foreign trusts while a person is alive under sec 679 (a)(5)
- You are the responsible party (transferor or grantor with inter vivos trust other than due to the death with a reportable incidence, executor of the decedent’s estate) to report an incident that took place during the financial year. A reportable event takes place.
- You are a US individual who, during the financial year, is treated as the asset owner of a foreign trust under the acts of sections 671 through 679. Grantor laws are covered under 671-679
- You are a US individual who got a distribution from a foreign trust during the financial year
- You are a US individual who is a beneficiary of a foreign trust or US owner, and either you or a US individual related to you can uncompensated use of trust property or receive a loan. The loan may be in marketable securities or even in cash.
- You are an American individual who has transferred property that includes a foreign trust or even cash to an individual related to the trust in exchange for an obligation.
- You are an American who, during the financial year, got either:
- More than $16388 from foreign partnerships or even foreign corporations that includes foreign individuals related to foreign partnerships or foreign corporations) that you treated as gifts
- More than $100,00 from a foreign estate or alien person that includes foreign individual related to that foreign estate or non-resident alien person that you treated as bequests or gifts
Pro tip:
The Internal revenue service determines retirement plans be trusted. Several foreign retirement plans are also non-qualified plans, and it is categorized as foreign trusts that are subjected to Form 3520
Do you have to file form 3520-A
In several cases, filing form 3520-A may go hand in hand with form 3520. The foreign trust should furnish the needed annual statements; else, the beneficiary or US owner should complete and attach Form 3520-A to Form 3520. US beneficiary gets a distribution from a foreign trust, and form 3520-A is required if a foreign trust exists with a US owner.
When does a reporting needs arise for Americans staying overseas? Instructions on form 3520
You can check out these examples to understand how the needs are triggered and more details about Form 3520
Form 3520 Example #1
John, who stays in Kansas, is a citizen of the United States with his parents. His grandfather, who is not a resident or US citizen, stays in Spain and wants to give $15,000. Grandfather who has a foreign grantor trust, and the trustee sends $15000 to John from the trust.
- Is form 3520- A required?
Yes, the beneficiary of the US of a foreign trust, John should make sure that he links his FGTBS or Foreign Grantor Trust Beneficiary Statement to form 3520. ( Page five of form 3520-A)
- Is the 3520 form required?
Yes, John is a US individual who has got distribution from a foreign trust, and due to this, he should file form 3520, part III and page one, to report the distribution properly.
Form 3520 Example #2
John, who stays with his parents, is a US citizen and stays in Kansas. He has a grandfather who is not a resident or even a citizen of the US. His grandfather stays in Spain and wishes to give John $15000. The grandfather has planned to write a check to John from his personal savings account that is in Spain.
In this scenario, let us know whether 3520-A and 3520 should be filed or not:
Is form 3520- A required?
No, John is not an owner of a foreign trust and has not received or accepted any distributions from a foreign trust. In this scenario, form 3520- A is not at all applicable
Is Form 3520 required?
No, John did not accept or get a distribution from a trust; this was a gift to John from a non-resident alien that is less than $100,000. So, in the case of John, there is no need to file a form 3520.
Form 3520 Example #3
Suzan, who currently stays in Germany and Suzan is a citizen of the USA, has opened a private pension plan. Suzan makes all the contributions to the plan, and it is properly monitored by a trustee who takes title to the asset to conserve the funds for Suzan, the beneficiary. With proper analysis, the trust is deemed to become eligible as a foreign grantor trust. It is well-protected from creditors.
Is Form 3520-A required?
Let us know, in this third example, whether it is necessary to file the 3520 and 3520-A form
- Yes, being a US owner of a foreign grantor trust, there is a need to file the 3520-A form
Is form 3520 need to be filed?
Yes, Suzan is an individual who belongs to the United States and satisfies the ownership regulations of a foreign trust. Suzan has also transferred the money or cash to the foreign trust. So, she has to file the 3520 form in this third case.
What Exceptions Should Americans Staying overseas understand about 3520-A
When it comes to Americans staying overseas, they must know a few exceptions. In this scenario, there are two exceptions to the need to file form 3520-A:
- Canadian RRIFs (Canadian registered retirement income funds), Custodians of Canadian registered retirement savings plans (RRSPs), or custodians who are any other Canadian retirement plan that becomes eligible under section 3 of Rev. Proc. 2014-55 are not needed to file 3520-A form for a resident alien or even a citizen of United States who is a beneficiary or owner.
- If a foreign trust is determined as an employee benefit plan under 404 (a)(4), (404A), or 402 (b)
What Are the Charges for Not Filing Form 3520?
There are charges if you fail to file form 3520 as needed might be severe.
- If you fail to file on time, form 3520-A, fail to file all minute details or even file includes incorrect details: The initial charge is the greater of 5 percent or $10,000 of the gross value of the trust’s property treated as owned by the US individual at the close of the financial year.
- If you fail to file a form 3520 on time (Part II), furnish incorrect details, or fail to furnish all details needed: This extra separate charge is the greater of 5 percent or $10,000 of the gross value of the part of the trust’s property treated as owned by the United States individual at the close of that financial year.
- If you fail to report distributions got from a foreign trust by an individual in the USA: the gross value of the total distributions is 35 percent.
- If anyone fails to report the transfer or even creation to a foreign trust: then the gross of 35 percent of any asset is transferred to a foreign trust.
Pro Tip
You must know that the deadlines for both forms are different! When it comes to the 3520 form follows the same schedule as the IRS tax return, and it is on 15th April, with expats who accepted or received an automatic extension for two months through 15th June. When it comes to the 3520-A form, it is due on 15th March; there might be another deadline to tuck into a file of crucial expat tax details!
Foreign Trusts vs. US Trusts
When it comes to reporting any trust on a US income tax return, you should understand the difference between a foreign trust or a US trust, as the reporting is different for each one of them.
- Foreign trust:
You might use form 1040NR and check the trust or estate box that is present in the upper-right-hand corner. If the grantor is a person, she or he might have to check the box on Part III, Schedule B, line 8 of Form 1040 every year to report the foreign trust
- US trust:
You may use the 1041 form and can check the grantor trust box that appears in the upper left corner.
The typical property protection trust may be categorized as a grantor trust who pays taxes while the settlor is staying. It means that the grantor may report and pay all the United States taxes reported by the trust that include dividends, capital gains, or interest.
Pro Tip
Internal revenue service eliminates using an offshore trust to differentiate the two, as offshore is technically a foreign trust or US trust- the major difference between the two foreign or US is in how you file them. You must remember this thing when it comes to a foreign trust or a US trust.
Foreign Trust Reporting and Form 3520
If you fail to report the form 3520 and it is due because of reasonable cause and not because of wilful neglect, the charges above may be abated for foreign trust reporting. On the positive part, both forms 3520-A and 3520 are no doubt informational returns that don’t have income taxes due with the filing of the forms. But, as we said, charges may be significant for non-compliance.
Filing Form 3520 Doesn’t Is At All Complicated
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