Tax Talk Thursday: Foreign Trust Reporting and Form 3520-A Compliance: What You Need to Know

May Sung
Apr 30
6 min read

If you are a US person who has an interest in a foreign trust — or if you serve as the trustee of one — the IRS requires you to report it. Failing to do so can result in significant penalties that start at 5% of the gross value of the trust assets. Understanding your obligations under Form 3520-A is essential for staying compliant and avoiding costly surprises.

What Is a Foreign Trust?

A foreign trust is any trust that does not meet both of the following conditions under US tax law:

• A US court must be able to exercise primary supervision over the trust's administration (the "court test").

• One or more US persons must have authority to control all substantial decisions of the trust (the "control test").

If a trust fails either test, it is classified as a foreign trust for US tax purposes — regardless of where it was created or where its assets are located.

What Is Form 3520-A?

Form 3520-A is the Annual Information Return of Foreign Trust with a US Owner. It is filed by the foreign trust itself (or by the US owner on behalf of the trust) and provides the IRS with a detailed picture of the trust's financial activities for the year.

This form is separate from Form 3520, which is filed by the US person who owns or receives distributions from a foreign trust. Think of it this way:

• Form 3520-A — Filed by or on behalf of the foreign trust itself

• Form 3520 — Filed by the US owner or beneficiary who receives distributions

Both forms may be required in the same tax year, depending on your situation.

Who Must File Form 3520-A?

A US owner of a foreign trust is responsible for ensuring that Form 3520-A is filed. Under IRC Section 679, you are considered a US owner of a foreign trust if:

• You transferred property to the foreign trust, and

• A US person is treated as the owner of any portion of the trust under the grantor trust rules (IRC Sections 671–679).

If the foreign trust does not file Form 3520-A on its own, the US owner must file a substitute Form 3520-A and attach it to their Form 3520.

What Information Is Reported on Form 3520-A?

Form 3520-A requires a comprehensive disclosure of the trust's financial information, including:

• The trust's income, deductions, and credits for the tax year

• The names and addresses of all US persons who have an ownership interest in the trust

• The fair market value of the trust's assets

• A Foreign Grantor Trust Owner Statement (provided to the US owner)

• A Foreign Grantor Trust Beneficiary Statement (provided to each US beneficiary)

The US owner is responsible for providing these statements to any US beneficiaries so they can properly report distributions on their own tax returns.

Filing Deadline and Extension

Form 3520-A is due on the 15th day of the 3rd month after the end of the trust's tax year. For trusts that operate on a calendar year, this means:

• Due date: March 15

• Extension available: File Form 7004 to request an automatic 6-month extension, pushing the deadline to September 15

Important: The extension for Form 3520-A is separate from the extension for your individual tax return (Form 4868). You must file Form 7004 specifically for the trust's return.

Penalties for Noncompliance

The IRS takes foreign trust reporting very seriously. Penalties for failing to file Form 3520-A — or filing it late or incomplete — can be severe:

• 5% of the gross value of the trust's assets treated as owned by the US person, for each year of noncompliance

• Minimum penalty: $10,000 per violation

• Additional penalties may apply if the IRS sends a notice and the form is still not filed within 90 days

These penalties are assessed against the US owner, not the trust itself, and they apply even if there is no tax due.

Common Situations That Trigger Form 3520-A Filing

Many US persons are surprised to discover they have a foreign trust reporting obligation. Some common situations include:

• Receiving an inheritance from a foreign relative that was held in trust

• Being named a beneficiary of a family trust established in another country

• Setting up an offshore trust for asset protection or estate planning purposes

• Transferring assets to a foreign trust as part of a business arrangement

• Foreign pension plans or retirement savings accounts that may be classified as foreign trusts under US law (see detailed discussion below)

Foreign Pension Plans as Foreign Trusts

One of the most overlooked foreign trust reporting obligations involves foreign pension plans. Many US persons who worked abroad — or who are foreign nationals now living in the US — hold retirement accounts in other countries without realizing that those accounts may be treated as foreign trusts under US tax law. If classified as a foreign trust, the pension plan triggers the same Form 3520-A and Form 3520 filing requirements discussed above.

Why Are Foreign Pensions Treated as Trusts?

Under US tax law, the IRS evaluates the legal structure of a foreign pension plan rather than simply accepting its label in the home country. Many foreign pension arrangements — particularly employer-sponsored or government-linked plans — are structured as trusts under their local law. Because they fail the court test and/or the control test (described above), the IRS classifies them as foreign trusts. This means the US owner may be required to:

• Report annual contributions to the pension plan on Form 3520

• Ensure Form 3520-A is filed annually disclosing the plan’s assets and income

• Report any distributions received from the plan on Form 3520

Common Foreign Pension Plans That May Require Reporting

The following foreign pension plans are among those that frequently raise foreign trust reporting questions for US persons:

• Canada – Registered Retirement Savings Plans (RRSP) and Registered Retirement Income Funds (RRIF): These are commonly held by Canadian-Americans or US citizens who worked in Canada. Under the US-Canada tax treaty, a US person can elect to defer income earned inside an RRSP/RRIF. Without this election, the income may be currently taxable in the US and trust reporting may apply.

• United Kingdom – UK Pension Schemes: UK employer-sponsored and personal pension schemes are generally structured as trusts under UK law. US persons with UK pensions may have Form 3520-A obligations unless a treaty position or other relief applies.

• Australia – Superannuation Funds: Australian “super” funds are a very common source of US reporting confusion. The IRS has generally taken the position that superannuation funds are foreign trusts, and US persons holding super funds are subject to Form 3520 and 3520-A requirements, as there is currently no comprehensive tax treaty between the US and Australia covering superannuation.

• India – Employees’ Provident Fund (EPF) and Public Provident Fund (PPF): These government-backed savings programs are commonly held by Indian nationals who have moved to the US. The IRS may classify these as foreign trusts, requiring annual reporting on Forms 3520 and 3520-A.

• Other Treaty Countries: Various other countries – including Germany, Netherlands, and Japan – have pension structures that may qualify for reduced reporting under applicable US income tax treaties. A treaty-based position must generally be disclosed on Form 8833.

Tax Treaties and Pension Relief

The US has tax treaties with over 60 countries, and several of these treaties include specific provisions addressing foreign pension plans. Where a treaty applies, a US person may be able to:

• Defer US income tax on earnings inside the pension until distributions are received

• Reduce or eliminate Form 3520-A filing requirements through a treaty-based position

• Claim a foreign tax credit for taxes paid to the foreign country on pension income

Important: Taking a treaty-based position requires disclosing it on Form 8833 (Treaty-Based Return Position Disclosure). Failing to file Form 8833 when required can itself result in a $1,000 penalty per failure ($10,000 for corporate taxpayers). Each pension plan and each treaty must be analyzed on a case-by-case basis to determine the correct filing position.

Steps to Stay Compliant

1. Determine if you are a US owner of a foreign trust under the grantor trust rules.

2. Identify whether the trust will file Form 3520-A on its own or whether you need to file a substitute form.

3. Gather the required financial information: income, deductions, asset values, and beneficiary details.

4. File Form 3520-A by March 15 (or request a 6-month extension using Form 7004).

5. Provide the required Foreign Grantor Trust Owner Statement and Beneficiary Statements to all applicable US persons.

6. File your own Form 3520 if you made transfers to, or received distributions from, a foreign trust during the year.

Can You Fix Past Noncompliance?

If you have missed prior years of foreign trust reporting, there may be options available to come into compliance while minimizing penalties. The IRS has offered various programs over the years, including the Streamlined Filing Compliance Procedures, which may be available to certain taxpayers who were not willfully noncompliant. Each situation is different, and it is strongly recommended that you work with a qualified tax professional to evaluate your options.

Have Questions About Foreign Trust Reporting?

Navigating foreign trust rules and Form 3520-A can be complex, but you do not have to figure it out alone. At MKHS Tax Group, we specialize in international tax compliance and can help you understand your obligations, avoid penalties, and get or stay compliant.