Demystifying IRS Form 3520: A Comprehensive Guide
By Jason Kovan · July 2, 2023
A broader look at Form 3520 obligations, the supporting facts the IRS expects, and what to do when a penalty has already been assessed.
Why Form 3520 deserves careful review
Foreign trusts, gifts, inheritances, and cross-border family arrangements often involve several people, jurisdictions, and documents. A filing that looks simple on its face can require a careful reconstruction of ownership and cash movement.
Form 3520 reporting should be considered alongside related international information returns, including Form 3520-A where applicable.
Build the factual record
Begin by collecting the trust agreement and amendments, statements showing transfers or distributions, correspondence with trustees and donors, and prior returns. Confirm the dates and values rather than estimating them from a later account balance.
The record should explain not only what happened but why the taxpayer believed a filing was or was not required.
- Identify every participant and their country of residence
- Create a dated record of transfers, gifts, and distributions
- Compare prior filings with the current year’s facts
If the IRS has assessed a penalty
A penalty notice should be reviewed promptly. The taxpayer may need to explain reasonable cause, show that a filing was complete or timely, correct an error, or request relief under an applicable IRS procedure.
The best response depends on the notice, the administrative history, and the evidence. A generic explanation rarely addresses the issues that matter to the IRS.
A focused next step
When the facts cross borders, a coordinated review by an international tax attorney and CPA can clarify the reporting position and the available response strategy.