Posted by James Financial Services Inc

Foreign Trust Reporting and Gift Transaction Reporting Penalties

Foreign Trust Reporting and Gift Transaction Reporting Penalties

The IRS has closely examined the accurate and timely reporting of foreign distributions and gifts to and from foreign trusts. As regards this, the Large Business and International Enterprises Division announced a compliance campaign on this topic by completing forms 3520 and 3520-A. 

The IRS imposes six and seven-digit fines on people who do not comply strictly or file late returns. Given the international component, the parties to these trust and gift transactions are often less familiar with the U.S. tax system. Many of these types of transactions need only be reported because they are international; otherwise, the same domestic transactions would not obligate you to report to the IRS. 

Reporting Requirements

The IRS has specific reporting conditions for "foreign trusts." A foreign trust is a trust over which a United States court can exercise primary jurisdiction over its administration or have one or more persons in the United States having the power to review all or substantially all of the decisions of the trust. The IRS has detailed guidelines on these requirements.

World Map Made of currencies as a general rule, Americans who have a foreign trust must submit Form 3520-A, Annual Information Return on Foreign Trusts, to an American owner. (The trustee is generally the guarantor.) Form 3520-A collects information about expenses, income, distributions, trust property, owners and beneficiaries of the trust, and expires on the 15th day of the third month from the end of the trust's fiscal year. 

The IRS Form 3520 is an annual report of transactions with a foreign trust and the receipt of certain foreign gifts, must be submitted by the trust owner on the same date as Form 3520-A when any of the following situations applies:

  • A foreign trust has made distributions, implied distributions, or a loan to an American.

  • A person in the United States is the guarantor of a newly created foreign trust

  • A person in the United States receives foreign donations of more than $ 100,000 from individuals or more than $ 16,076 from a foreign company or association (adjusted annually for inflation)

  • An American owns a foreign trust

  • An American person makes a free transfer (or transfers in exchange for a bond) to a foreign trust

Many of these reporting obligations fall on the executor when the American person dies.

There are many important points here. First, many of these trust and gift transactions would not normally be reported to the IRS. For example, if a person in the United States creates a revocable national trust, they probably do not have a separate obligation to report the transaction to the IRS. The recipient of a foreign donation must also register Form 3520, but the recipient of a domestic donation is not required. When a person in the United States makes a national donation, only the donor files a tax return. As a result, people in the United States who receive large gifts are generally not required by the tax professional for these transactions. Therefore, non-compliance with foreign gifts may be a slight error.

Transfers and distributions to foreign companies that have relationships with individuals in the United States may also be subject to the reporting obligation on Form 3520. For example, if a foreign company receives a gift from another foreign company, but from the recipient, the company belongs to a U.S. entity, the recipient company must submit Form 3520.2. The requirement to file Form 3520-A is separate from the requirement to file Form 3520; therefore, an American homeowner will often have to file both. 


The penalty for non-compliance with a Form 3520-A is greater than $ 10,000 or 5% of the trust fund allocated to the U.S. owner. There is no law for the limits that the IRS imposes sanctions, and the agency can impose multiple 5% penalties The IRS can also impose heavy penalties if a Form 3520 is not filed on time, is incomplete or incorrect. The fine is greater than $10,000 or:

  • 35% of the gross value of any property assigned to a foreign trust if a person in the United States does not declare the creation or transfer of a foreign trust

  • 35% of the gross value of distributions received from a foreign trust by an American who does not declare having received the distribution

  • 5% of the gross value of all foreign trust activities treated as U.S. property if the U.S. owner does not provide the required information (in addition to the 5% penalty for not submitting Form 3520-A)

If the United States citizen does not file a Form 3520 more than 90 days after the IRS has given notice of default, there will be an additional penalty of $ 10,000 for each additional 30 days. The penalty for not completing a Form 3520 that should have reported a foreign gift or inheritance or for filling out an incorrect or incomplete form connected with a gift or inheritance is 5% of the gift or inheritance for each month the bankruptcy continues, up to a maximum of 25% of this.

Unlike almost all other tax penalties, when the IRS applies penalties 3520-A and 3520, these actions are not subject to normal disability rules. You do not have the right to challenge the decision in court unless he or she pays the full penalty first. Professionals have shared anecdotes about statements sent a few months late or with a blank line, and the IRS has reportedly imposed the maximum fine, which the taxpayer cannot challenge in court until the full amount is paid. The Internal Revenue Service has an amnesty plan for other international tax arrears, but taxpayers who must complete Forms 3520 and 3520-A are not eligible for it.


Income tax preparers whose clients may have the reporting requirements of Form 3520 and Form 3520-A should be aware of these exclusive reporting obligations.

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