Foreign Trust Reporting (Form 3520): Requirements, Penalties, and Relief Options

Who Must File Form 3520

Under the current IRS instructions, a U.S. person generally must file Form 3520 for a tax year in which the person:

• Creates a foreign trust or transfers money or property to one, or is otherwise the responsible party for a “reportable event,” including certain events at death;
• Is treated as the owner of any part of a foreign trust under the grantor trust rules of sections 671 through 679;
• Receives a distribution from a foreign trust, directly or indirectly, or, as a U.S. owner or beneficiary, receives a loan of cash or marketable securities from the trust or the uncompensated use of trust property; or
• Receives large gifts or bequests from foreign persons, discussed below.

A separate Form 3520 is filed for each foreign trust, and distributions are reported whether or not they are taxable. The IRS also cautions that some foreign pension and retirement plans may be treated as foreign trusts, although exceptions apply to certain plans, including Canadian RRSPs and RRIFs.

Foreign Grantor Trusts and Form 3520-A

Under section 679, a U.S. person who transfers property to a foreign trust is generally treated as the owner of the portion of the trust attributable to that property for any year in which the trust has a U.S. beneficiary. Exceptions include transfers by reason of death and transfers for at least fair market value. Under section 671, the owner includes the income, deductions, and credits of that portion in computing his or her own taxable income, whether or not anything is distributed.

A foreign trust with a U.S. owner must file Form 3520-A by the 15th day of the 3rd month after the end of its tax year (March 15 for a calendar-year trust); an extension may be requested on Form 7004. The U.S. owner is responsible for making sure the trust files and furnishes the Foreign Grantor Trust Owner and Beneficiary Statements. If the trust does not file, the owner must attach a substitute Form 3520-A to his or her own Form 3520 by that form’s due date to avoid the penalty. A U.S. owner completes Part II of Form 3520 every year, even if there were no transactions with the trust.

Distributions From Foreign Nongrantor Trusts

If the trust is not a grantor trust, a U.S. beneficiary reports distributions on Form 3520 and includes the taxable portion in income. A beneficiary who receives a complete Foreign Nongrantor Trust Beneficiary Statement can generally report based on the trust’s actual income information. Without one, the instructions require a default calculation based on distributions in the three preceding years, under which part of the distribution is treated as ordinary income and any excess as an accumulation distribution.

Accumulation distributions are subject to the throwback rules of sections 665 through 668. The additional tax is computed on Form 4970, and section 668 adds an interest charge on accumulation distributions from foreign trusts.

Gifts and Bequests From Foreign Persons

Gifts and inheritances are generally excluded from the recipient’s gross income under section 102, but large gifts from foreign persons must still be reported in Part IV of Form 3520. Reporting is required if, during the tax year, a U.S. person receives:

• More than $100,000 from a nonresident alien individual or a foreign estate, including gifts from foreign persons related to that individual or estate; or
• More than the inflation-adjusted section 6039F threshold from foreign corporations or foreign partnerships (including related foreign persons) that the recipient treated as gifts: $20,116 for 2025 (Rev. Proc. 2024-40) and $20,573 for 2026 (Rev. Proc. 2025-32).

Due Dates

For calendar-year individuals, Form 3520 is generally due April 15, or no later than October 15 if the individual is granted an extension of time to file the income tax return. A U.S. citizen or resident who, on the return due date, lives outside the United States and Puerto Rico and has a place of business or post of duty outside them, or who is in military or naval service on duty outside them, has until June 15 and includes a statement with the form showing that the condition is met. The instructions direct filers to mail Form 3520 to an IRS Service Center in Ogden, Utah.

Penalties

Under section 6677, the initial penalty for a late, incomplete, or incorrect Form 3520 or 3520-A is the greater of $10,000 or:

• 35% of the gross value of property transferred to a foreign trust, for an unreported transfer;
• 35% of the gross value of distributions received from a foreign trust, for an unreported distribution; or
• 5% of the gross value of the trust assets treated as owned by a U.S. person, if the foreign trust fails to file a timely and complete Form 3520-A and furnish the required statements. The U.S. owner is liable for this penalty.

If the failure continues more than 90 days after the IRS mails a notice, an additional $10,000 applies for each 30-day period or part of one, but the total cannot exceed the gross reportable amount once that amount can be determined. For unreported foreign gifts, section 6039F allows the IRS to determine the income tax consequences of the gift and imposes a penalty of 5% of the gift for each month the failure continues, up to 25%.

Reasonable Cause

No penalty applies under section 6677 or section 6039F if the failure was due to reasonable cause and not willful neglect. For section 6677, the statute and the instructions narrow the defense: the fact that a foreign country would penalize disclosure is not reasonable cause, and neither is a foreign fiduciary’s reluctance to disclose or a trust provision that prevents disclosure.

Options for Late Filers

Taxpayers who are not under a civil examination or criminal investigation and have not been contacted by the IRS about the delinquent returns may use the IRS Delinquent International Information Return Submission Procedures, filing the late forms under their instructions and attaching a reasonable cause statement where reasonable cause is asserted. Penalties may still be assessed, but the IRS states that for Forms 3520 and 3520-A, reasonable cause statements will be considered before a penalty is assessed.

Where unreported income is also involved, the Streamlined Filing Compliance Procedures may be available to taxpayers who certify that their conduct was not willful. Streamlined submissions do not result in a closing agreement and may be selected for audit. Taxpayers concerned that their conduct may have been willful should consider the IRS Criminal Investigation Voluntary Disclosure Practice.

Related Reporting: Form 8938 and FBAR

Form 3520 does not replace Form 8938 or the FBAR. An asset reported on Form 3520 or 3520-A need not be listed again on Form 8938, but the filer identifies those forms on Form 8938 and counts the asset’s value toward the Form 8938 threshold. According to the IRS comparison of Form 8938 and FBAR requirements, foreign accounts held by a grantor trust are reportable on the grantor’s FBAR.

The Bottom Line

Because Form 3520 and 3520-A penalties are tied to the amounts involved rather than the tax due, these obligations are best reviewed before a foreign trust is created, funded, or makes a distribution, and promptly once a missed filing is discovered.