January 24, 2022 Matthew Smith

IRS FILING OBLIGATIONS – FORM 3520-A

BY MATTHEW SMITH, GROUP GENERAL MANAGER

US persons who have established a foreign trust are required to file a Form 3520-A with the IRS every year if they are classed as the US owner of the trust for US tax purposes. This will usually be the case if they are a settlor or grantor of the trust, but the rules can also apply in certain circumstances to foreign trust beneficiaries and to persons who have contributed assets to a foreign trust.

The Form 3520-A is a mechanism for reporting trust income, contributions and distributions. It is an essential form that must be sent to the IRS by no later than 15 March each year (or 15 September where a filing extension has been granted).

In most cases the form is signed by the trustee before being sent to the IRS. The trustee will review the form to ensure that all reported contributions and distributions tally with its own records, and will request additional information where there is a discrepancy to ensure that previous trust transactions have been properly documented. For this reason it is also important to provide a copy of any self-filed 3520-A to the trustee after filing so that the trustee can carry out this same exercise.

If you are uncertain as to whether you are required to file Form 3520-A or any other related forms, it is essential that you consult with your CPA so that you can be fully appraised of your filing obligations. Owing to the complexities involved in US tax law as it relates to foreign trusts, Southpac is unable to advise clients as to whether they are required to file this or any other IRS form.

The responsibility for filing Form 3520-A lies not with the trust or with the trustee, but with the US owner. Penalties for failure to file, or even just for late filing, can be draconian: a US owner who fails to secure timely filing of the Form 3520-A is liable to pay a penalty of 5 per cent of the value of the trust fund; and a beneficiary who has failed to report a distribution from a foreign trust on Form 3520-A within the prescribed deadlines is liable to an enormous 35% of the value of the distribution.

These penalties were upheld by the Second Circuit Court of Appeals in the July 2021 case of Wilson v. United States, Case No. 2:19-cv-05037, in which the US owner of a foreign trust, who was also a beneficiary, failed to timely file Form 3520-A in relation to a distribution of US$9.2m. Although all taxes were properly paid in connection with the distribution, the IRS assessed a late filing penalty of over $3.2m which was ultimately affirmed by the Appeal Court. This underscores the importance of US persons who settle, contribute assets to or receive distributions from a foreign trust obtaining specialist tax advice so that they can satisfy their IRS filing obligations.

In order to ensure that all Form 3520-A’s with a 15 March filing deadline can be properly processed and executed by the trustee and despatched to the IRS on time, Southpac requests that all clients who are required to file this form submit it for signature to their usual Southpac point of contact as soon as possible, and in any event no later than 8 March. We cannot guarantee that forms received after this date will be able to be processed and sent to the IRS by the 15 March deadline.

More information about Form 3520-A can be found on the IRS website.

Matthew Smith

Matthew joined Southpac in March 2017 and was appointed as General Counsel in July 2020 before assuming the role of Group General Manager in January 2023. Matthew originally graduated with a BA Hons in French and Linguistics from the University of Durham, UK, before obtaining Graduate Diplomas in Law and Legal Practice from the University of Law in London. He is a dual-qualified lawyer/attorney, having been admitted as a Solicitor of the Senior Courts of England and Wales in 2008 and as a Barrister and Solicitor of the High Court of New Zealand in 2017. Matthew obtained a Trust and Estate Practitioner designation from STEP, the Society of Trust and Estate Practitioners, in 2021 after passing the STEP Diploma in International Trust Management with distinction. He received three STEP Excellence Awards for achieving the highest worldwide total STEP Diploma score via distance learning, and the highest score in two individual Diploma papers. Matthew has worked closely with many of Southpac’s clients and referrers during his time with the company. He is passionate about ensuring Southpac provides world-class fiduciary services to its clients to help them safeguard their assets and protect their legacies.
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