In recent months, the IRS has revised a public announcement and issued an LB&I Practice Unit concerning information returns and penalties associated with foreign trusts. The public announcement attempts to educate taxpayers of the Form 3520-A reporting obligation, and the Practice Unit seeks to educate IRS examiners of the Form 3520-A penalties. Both are discussed more below.
Form 3520-A Public Announcement
The announcement, revised April 15, 2025, provides a summary of the Form 3520-A reporting requirement, including the “who, when, and where” related to the information return.
- Who Must File. Generally, foreign trusts have an obligation to file a Form 3520-A with the IRS if the trust has a U.S. person who falls under the grantor trust rules. Because foreign trusts are outside U.S. jurisdiction, federal tax law requires U.S. persons to file a “substitute” Form 3520-A if the foreign trust does not. In these latter instances, the U.S. person must attach the substitute Form 3520-A to Form 3520 (another information return related to foreign trusts).
- When To File. The filing deadline for the Form 3520-A depends on whether the foreign trust files the information return or the U.S. person files a substitute return. If the foreign trust files the Form 3520-A, it must do so by the 15th day of the third month after the end of its tax year. If a U.S. person files the substitute Form 3520-A, the U.S. person must do so by the 15th day of the fourth month after the end of the tax year (generally, April 15). Both a foreign trust and a U.S. person may file for an extension of time to file.
- Where To File. U.S. persons do not file the Form 3520-A (or the Form 3520) with their income tax return. Instead, the forms are stand-alone information returns that must be submitted to the IRS office in Ogden, Utah.
Form 3520-A LB&I Practice Unit
The IRS released the LB&I Practice Unit on May 1, 2025. Although the Practice Unit relates to both Form 3520 and Form 3520-A penalties, the below summary taken from the Practice Unit focuses solely on the Form 3520-A penalties.
- Penalties. Late-filing Form 3520-A penalties are steep. The Practice Unit reminds examiners that they may impose penalties equal to the greater of $10,000 or 5% of the “gross reportable amount.” For these purposes, the gross reportable amount is the gross value of the trust assets at the end of the tax year. In addition, the IRS can impose continuation penalties if the agency notifies a U.S. person of the missed filing and the person fails to file the Form 3520-A within 90 days of the notice.
- Reasonable Cause. The IRS cannot assess Form 3520-A penalties if the U.S. person demonstrates reasonable cause for the non-compliance. The Practice Unit cautions IRS examiners that reasonable cause arguments associated with continuation penalties should be more scrutinized as the U.S. person had written notice from the IRS of the 90-day deadline. Moreover, the Practice Unit reminds examiners that they should ask for the reasonable cause statement in writing, signed under penalties of perjury.
- Statute of Limitations. The Practice Unit advises examiners that the statute of limitations to impose Form 3520-A penalties does not end until three years after a complete and accurate Form 3520-A has been filed. In other words, the IRS has an unlimited amount of time to assess a Form 3520-A penalty if no information return has been filed.
Compliance Options
U.S. persons with missed Form 3520-A filings have options. In many instances, these taxpayers may qualify for relief under the IRS’ Streamlined Filing Compliance Procedures (SFCP). To qualify, however, the taxpayer must have unreported foreign income from certain reportable foreign assets and demonstrate non-willfulness, among other requirements.
Taxpayers who fail to meet the requirements of the SFCP should consider the IRS’ Voluntary Disclosure Program (VDP). Although the VDP has higher penalties and a longer lookback period compared to the SFCP, the VDP can reduce criminal risks, particularly compared to another compliance option known as a “quiet disclosure.”
Finally, the Delinquent International Information Return Submission Procedures (DIIRS) is another option for U.S. persons who missed a Form 3520-A filing deadline and who do not qualify for the SFCP. Under these procedures, the taxpayer submits the late Form 3520-A with a reasonable cause statement. Under more recent guidance, the IRS no longer assesses an automatic late-filing penalty in these circumstances—instead, the agency reviews the reasonable cause determination to decide whether the penalty should be imposed. If the IRS imposes the penalty, even with the reasonable cause statement, the taxpayer may request review of the penalty determination with the IRS Independent Office of Appeals.