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only be imposed to the extent that the transaction is not

When and Where To File

reported. For example, if a U.S. person transfers property

In general, Form 3520 is due on the date that your income

worth $1 million to a foreign trust but only reports $400,000

tax return is due, including extensions. In the case of a Form

of that amount, penalties could only be imposed on the

3520 filed with respect to a U.S. decedent, Form 3520 is

unreported $600,000.

due on the date that the estate tax return is due (or would be

For more information, see section 6677.

due if the estate were required to file a return), including

Reasonable cause. No penalties will be imposed if the

extensions. Send Form 3520 to the Internal Revenue

taxpayer can demonstrate that the failure to comply was due

Service Center, P.O. Box 409101, Ogden, UT 84409.

to reasonable cause and not willful neglect.

Form 3520 must have all required attachments to be

Note. The fact that a foreign country would impose

considered complete.

penalties for disclosing the required information is not

Note. If a complete Form 3520 is not filed by the due date,

reasonable cause. Similarly, reluctance on the part of a

including extensions, the time for assessment of any tax

foreign fiduciary or provisions in the trust instrument that

imposed with respect to any event or period to which the

prevent the disclosure of required information is not

information required to be reported in Parts I through III of

reasonable cause.

such Form 3520 relates, will not expire before the date that

is 3 years after the date on which the required information is

Definitions

reported. See section 6501(c)(8).

Distribution

Who Must Sign

A distribution is any gratuitous transfer of money or other

If the return is filed by:

property from a trust, whether or not the trust is treated as

•

An individual or a fiduciary, it must be signed and dated

owned by another person under the grantor trust rules, and

by that individual or fiduciary.

without regard to whether the recipient is designated as a

•

A partnership, it must be signed and dated by a general

beneficiary by the terms of the trust. A distribution includes

partner or limited liability company member.

the receipt of trust corpus and the receipt of a gift or bequest

•

A corporation, it must be signed and dated by the

described in section 663(a).

president, vice president, treasurer, assistant treasurer,

A distribution also includes constructive transfers from a

chief accounting officer, or any other corporate officer (such

trust. For example, if charges you make on a credit card are

as a tax officer) who is authorized to sign.

paid by a foreign trust or guaranteed or secured by the

The paid preparer must complete the required preparer

assets of a foreign trust, the amount charged will be treated

information and:

as a distribution to you by the foreign trust. Similarly, if you

•

Sign the return in the space provided for the preparer’s

write checks on a foreign trust’s bank account, the amount

signature.

will be treated as a distribution.

•

Give a copy of the return to the filer.

Also, if you receive a payment from a foreign trust in

exchange for property transferred to the trust or services

Inconsistent Treatment of Items

rendered to the trust, and the FMV of the payment received

The U.S. beneficiary and U.S. owner’s tax return must be

exceeds the FMV of the property transferred or services

consistent with the Form 3520-A, Annual Information Return

rendered, the excess will be treated as a distribution to you.

of Foreign Trust With a U.S. Owner, filed by the foreign trust

Examples

unless you report the inconsistency to the IRS. If you are

1. If you sell stock with an FMV of $100 to a foreign trust

treating items on your tax return differently from the way the

and receive $150 in exchange, you have received a

foreign trust treated them on its return, file Form 8082,

distribution of $50.

Notice of Inconsistent Treatment or Administrative

2. If you receive $100 from the trust for services

Adjustment Request (AAR). See Form 8082 for more

performed by you for the trust, and the services have an

details.

FMV of $20, you have received a distribution of $80.

Penalties

See the instructions for Part III, line 25, on page 7, for

A penalty generally applies if Form 3520 is not timely filed or

another example of a distribution from a foreign trust.

if the information is incomplete or incorrect. Generally, the

Foreign Trust and Domestic Trust

penalty is:

•

35% of the gross value of any property transferred to a

A foreign trust is any trust other than a domestic trust.

foreign trust for failure by a U.S. transferor to report the

A domestic trust is any trust if:

transfer,

•

1. A court within the United States is able to exercise

35% of the gross value of the distributions received from a

primary supervision over the administration of the trust; and

foreign trust for failure by a U.S. person to report receipt of

2. One or more U.S. persons have the authority to

the distribution, or

•

control all substantial decisions of the trust.

5% of the amount of certain foreign gifts for each month

for which the failure to report continues (not to exceed a

Grantor

total of 25%). See section 6039F(c).

If a foreign trust has a U.S. owner and the trust fails to file

A grantor includes any person who creates a trust or directly

the required annual reports on trust activities and income,

or indirectly makes a gratuitous transfer of cash or other

the U.S. owner is subject to a penalty equal to 5% of the

property to a trust. A grantor includes any person treated as

gross value of the portion of the trust’s assets treated as

the owner of any part of a foreign trust’s assets under

owned by the U.S. person (the gross reportable amount).

sections 671 through 679, excluding section 678.

See Form 3520-A.

Note. If a partnership or corporation makes a gratuitous

Additional penalties may be imposed if noncompliance

transfer to a trust, the partners or shareholders are generally

continues after the IRS mails a notice of failure to comply

treated as the grantors of the trust, unless the partnership or

with required reporting. However, this penalty may not

corporation made the transfer for a business purpose of the

exceed the gross reportable amount. Also, penalties will

partnership or corporation.

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Instructions For Form 3520 - Annual Return To Report Transactions With Foreign Trusts And Receipt Of Certain Foreign Gifts - 2008 Page 2

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