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Tag Archive for Form 3520-A

Failure To Report Foreign Trust Results In 35% Penalty Against The Owner/Beneficiary

Failure To Report Foreign Trust Results In 35% Penalty Against The Owner/Beneficiary

The 35% penalty under I.R.C. section 6677 for failing to report a distribution from a foreign trust applies against a person who is both the beneficiary and grantor/owner of a foreign trust.  At least, that is now the rule for taxpayers in the second circuit.  This draconian penalty for failing to properly report a foreign trust is applicable even if the taxpayer and trust paid all required taxes, if any, with respect to the trust.

In the case before the court, the taxpayer (Wilson) was the sole owner and beneficiary of a foreign trust.  He received a distribution from the foreign trust.  He filed his tax return late.  The IRS assessed a penalty equal to 35% of the amount of the distribution for failing to timely disclose the distribution.

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The #FATCA Is Americans Abroad Are Subjected To A Far More Punitive Tax System Than Homeland Americans


The purpose of this post is to continue the discussion generated by the “Open Letter To Democrats Abroad” (discussing the notion that “revenue neutrality” should be part of the “citizenship taxation” debate) and the “13 Reasons Why” (describing why Americans abroad are being forced to renounce U.S. citizenship.

Neither of those posts really described that fact that as ridiculous and unfair as “citizenship-based taxation” is, Americans abroad are “in effect” subject to a separate tax system than are Homeland Americans. A more extensive version of this post appeared at Tax Connections on March 13, 2019.

There are many instances where a U.S. citizen living abroad who earns his salary abroad, owns his assets abroad, has his pension abroad and is married to a non-U.S. spouse will pay higher U.S. taxes on income that is local to him than a comparable Homeland American would pay on income that is local to him.

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Great News For IRS Form 3520-A Filers Effecting Thousands Of Taxpayers

Gary Carter

The IRS Office of Associate Chief Counsel (International) has agreed to investigate an erroneous penalty campaign by the IRS targeting foreign trust owners who have timely filed Substitute Form 3520-A. If you  have clients who have received one of these Form 3520-A penalty notices, we need your input.

The IRS would like specific information from taxpayers who have been targeted, so I have created a password protected information form to distribute to practitioners.  Your client (or you) should complete the form, save it, then open it to ensure the data is there before sending it back to me. Request Form from me at


Out of frustration with the IRS, I published a blog article last summer describing my experience with one of my clients who had received a $10,000 penalty notice for Form 3520-A after properly filing the form. The comments and reactions to the article have indicated the problem is systemic and pervasive, potentially affecting thousands of taxpayers. The Taxpayer Advocate office has been unable to help.

I happened to sit next to Mark Koziel, Executive Vice President of the AICPA at a dinner in October. I described the problem to him. He sent my article to Eileen Sherr with the AICPA Tax Policy & Advocacy Team.

On November 15, the AICPA Trust, Estate and Gift Tax Technical Resource Panel met with IRS representatives from the Office of Associate Chief Counsel and described the issue. The IRS attorneys then had a call with the IRS processing and penalty groups responsible for these penalty notices and relayed our concerns. The processing and penalty groups agreed to a follow up call with the AICPA in January to address the issue, but first wanted to get details about individuals affected.

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Shocking Behind The Scenes Story: Tax Professionals Advocating For Taxpayers On 3520-A IRS Penalties

Form 3520-A

Taxpayers have been privately emailing TaxConnections asking if there is anything happening behind the scenes to address the problems they have encountered with IRS Form 3250 A. Many taxpayers were kind enough to share their stories which include the following:

It all started with the letter written by member Gary Carter who wrote an article titled Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers. The purpose of my post today is to share some of the stories that have followed from this original article when we were asked to call out all tax professionals and taxpayers to sharing their experiences with us.

It is important to note to that the tax professional community works very hard to solve many matters with the IRS. This article is enlightening as there are comments here you would rarely see regarding how the system works for those who represent you. Your tax advisors are often unsung heroes and taxpayers rarely know what the real battles are behind the scenes with the tax advisors representing them. Although we are keeping everyone’s name anonymous to protect them, you are about to receive a real world inside look at the unresolved issues on Form 3520-A.

Here Are Responses We Have Received From Taxpayers

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Form 3520 And Substitute Form 3520-A For Foreign Trusts And Gifts From Nonresidents

Gary Carter Form 3520-A

Section 6048 of the Internal Revenue Code requires a United States person, as defined for FBAR reporting, (and the executor of the estate of a US decedent) to file Form 3520 to report:

  • Certain transactions with foreign trusts,
  • Ownership of foreign trusts, and
  • Receipt of certain large gifts or bequests from certain foreign persons.

Additionally, an owner of a foreign trust might be required to file a Substitute Form 3520-A if the foreign trust fails to file Form 3520-A (See SUBSTITUTE Form 3520-A below). Here is Form 3520 and Instructions.

What Is a Foreign Trust For Which Form 3520 Must Be Filed?

Although the Internal Revenue Code (IRC) refers to trusts in numerous sections, nowhere in the IRC is the term “trust” actually defined. There is a definition of foreign trust. IRC Section 7701(a)(31)(B) says: “The term ‘foreign trust’ means any trust other than a trust described in subparagraph (E) of paragraph (30).” Subparagraph (E) describes “any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.”

So a foreign trust is one that is not under the jurisdiction of United States courts or controlled by a United States person. But what is a “trust”?

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IRS Form 3520-A: Annual Information Return Of Foreign Trust With A U.S. Owner

Future Developments

For the latest information about developments related to Form 3520-A and its instructions, such as legislation enacted after they were published, go to

Purpose of Form

Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671 through 679).

Who Must File

A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See Part II, line 22, of the Instructions for Form 3520. Otherwise, the U.S. owner may be liable for a penalty. See Penalties, later.

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Beyond The FBAR – Everything You Never Wanted To Know About All of The Other International Reporting Forms (But Must)

With all of the focus on FBARs and Form 8938s these days, it’s sometimes easy to forget about the other IRS international reporting forms. Below is a list of other important international reporting forms that relate to foreign asset reporting along with their penalties.

(1) Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts: Under IRC § 6048, taxpayers must report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust, and receipt of distributions from foreign trusts. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information Read more