Foreign Trust Reporting and form 3520 for Americans living abroad

By ZM Ishmurzina

Foreign trust or form 3520 is one of the latest tax puzzles for Americans living abroad. American expats face an increasing complexity of US expat tax returns. Many expats are familiar with foreign income exclusion, foreign housing exclusion and foreign tax credit. However, they don’t realize that the highest penalties result for a failure to file all required forms like FBARs, PFIC, FATCA etc.

This is an email from one of our clients. “I filed my prior tax returns. However, I read on one of the forums that I have to file a form 3520. I was told by other American expats that I have a foreign trust fideicomiso. What should I do to file correctly my US expat tax returns?”

Form 3520 and Key Expat Tax Reporting Requirements

Who has to file 3520 form?

Per the IRC § 6048(a) all transactions with foreign trusts must be reported on the form 3520. The parties that might be subject to the reporting are the following:

  • Responsible party
  • Owner of the trust
  • Beneficiary of the trust

When is 3520 form due?

Form 3520 should be filed with the taxpayer’s annual income tax return by the due date of US expat tax returns. If a taxpayer files for an extension until October 15, the trust form is due by October 15. A copy of the form must also be sent to the IRS Philadelphia Service Center.

Which information must be reported on form 3520?

  • Name, address and identification information of the foreign trust
  • Beneficiaries and ownership percentage
  • Location of the trust
  • Value of cash or other property transferred to the trust

What are penalties for a failure to file the form?

The penalty for a failure to file this form or an incomplete expat tax returns is 35 percent of the gross reportable amount.

Conclusion

Additional reporting requirements are imposed on owners and beneficiaries.

American expats with foreign trusts must consult an expatriate tax CPA that provides international tax services. An expat tax preparer will provide a guidance about foreign trusts, FBARs, FATCA, PFIC and other complex overseas tax issues. International tax experts at Artio Partners are here to help you.