Form 3520 Foreign Trust Reporting: The IRS Trap Most Expats Miss

The same quiet mistake catches thousands of Americans abroad every year. You move overseas and open the local accounts everyone in your new country uses: a tax-free savings account in Canada, a workplace pension in the UK, a superannuation fund in Australia. Nobody warns you that the IRS may look at those ordinary vehicles and see a foreign trust, and that the paperwork attached to a Form 3520 foreign trust filing carries some of the harshest penalties anywhere in the tax code. This article walks through how the trap works, who gets caught, and what to do if you have already missed years of filings.

The United States taxes based on citizenship, not residence. If you hold a US passport or a green card, your reporting obligations follow you regardless of where you actually pay tax. The Internal Revenue Code forces foreign financial structures through domestic definitions that were written to catch offshore tax evasion by the ultra-wealthy, and those definitions are wide enough to now sweep up middle-class expats and dual citizens as a matter of routine. Our guide to FBAR and FATCA reporting covers the asset-disclosure side that runs in parallel to everything below.

What Form 3520 Actually Is (And Who Has to File It)

Form 3520 is not a tax return that calculates what you owe. It is an information return that tells the IRS about wealth moving across the US border, and you can owe zero tax and still be penalized brutally for not filing it.

The form has four parts, each triggered by a different event:

• Part I, transfers to a foreign trust. Under IRC Section 6048(a), creating a foreign trust or moving money or property into one triggers this filing. An expat funding a local family trust for estate planning lands here.
• Part II, US owner of a foreign trust. Under IRC Section 6048(b), anyone treated as owner of a foreign trust under the grantor trust rules files Part II every year, even if nothing happened inside the trust that year. An American holding an Australian superannuation account classified as a grantor trust lands here.
• Part III, distributions from a foreign trust. Under IRC Section 6048(c), any distribution received from a foreign trust, direct or indirect, gets reported here. A US beneficiary receiving a payout from a deceased relative's UK trust is the classic case.
• Part IV, receipt of certain foreign gifts. Under IRC Section 6039F, large gifts or inheritances from foreign persons get reported here, a trigger that catches people with no trust involvement at all.

The deadline tracks your income tax return: the 15th day of the 4th month after your tax year ends, April 15 for most people. Living abroad gets you an automatic extension to June 15, and filing Form 4868 for your 1040 pushes the 3520 to October 15. One quirk is that it gets mailed to a specific IRS service center in Ogden, Utah, separate from your actual tax return, which is part of why the form slips through the cracks so often.

IRS Foreign Trust Reporting: The Accounts You Don't Know Qualify

The word "trust" does not need to appear anywhere in your account documents to trigger IRS foreign trust reporting. Under Treasury Regulation Section 301.7701-4, an arrangement is a trust if its purpose is to vest responsibility in a trustee to protect and conserve property for beneficiaries. If someone holds and manages assets for your benefit, the IRS may call it a trust regardless of whether your bank marketed it as a pension, a savings account, or an insurance wrapper.

Once it is a trust, it is a foreign trust unless it passes two tests at once. The Court Test asks whether a US court can exercise primary supervision over the trust's administration. The Control Test asks whether US persons control all substantial decisions, including distributions, beneficiaries, and investments, with no foreign person able to veto them. Almost every ordinary foreign account fails both tests on the spot, because it answers to foreign law and a foreign administrator.

The accounts that catch real people:

• Canadian TFSAs. The Tax-Free Savings Account is genuinely tax-free in Canada, but the US-Canada treaty does not protect that status as a pension, and depending on how the institution structured it, a TFSA can be a deposit account, an annuity, or a formal trust. Absent blanket IRS guidance, the conservative practitioner consensus treats trust-structured TFSAs as foreign grantor trusts, triggering both Form 3520 and Form 3520-A. Since no Canadian tax applies to the income, there are no foreign tax credits to offset the resulting US tax, producing double taxation on an account designed to be tax-free.
• Canadian RESPs, RRSPs, and RRIFs. Revenue Procedure 2014-55 exempted these from the 3520 and 3520-A filings, but only for information reporting. An RESP is still a foreign grantor trust for income tax purposes, so you still report and pay US tax on the internal earnings, dividends, capital gains, and even the Canadian government grants, and the account still shows up on your FBAR and Form 8938.
• UK pensions (SIPPs and QROPS). Self-Invested Personal Pensions and Qualifying Recognised Overseas Pension Schemes vest legal ownership in a scheme administrator, making them foreign trusts under US law. The US-UK treaty generally defers tax on internal growth until distribution, but does not erase Title 26 information reporting. Contributing, taking distributions, or being treated as owner generally puts Form 3520 in play, and a QROPS can trigger both 3520 and 3520-A, sometimes making the structure non-viable for an American.
• Australian superannuation. Australia's compulsory retirement system is treated by the IRS as a foreign grantor trust or an employee benefit trust, not a 401(k) equivalent. Mandatory employer contributions can be immediately taxable in the US, internal growth may require annual 3520 and 3520-A filing, and it overlaps with FBAR and FATCA on top.

Revenue Procedure 2020-17 offers a relief valve for certain tax-favored foreign retirement and savings trusts, exempting them from 3520 and 3520-A filing if the trust meets strict written local-law contribution limits (for example, capping non-retirement savings contributions at 10,000 dollars a year or 200,000 dollars over a lifetime) and you are otherwise compliant on the income. Many discretionary trusts, high-limit pensions, and heavily funded superannuation configurations exceed those limits, so the analysis has to happen account by account. Our deeper treatment of offshore trusts walks through how these structures are classified and why the grantor versus non-grantor distinction changes everything.

Form 3520 vs Form 3520-A: Two Forms, Different Jobs

Form 3520 is the US person's disclosure. Form 3520-A is the trust's own annual information return, required whenever a foreign trust has at least one US owner under the grantor trust rules. The 3520-A reports the trust's income, expenses, and balance sheet under US principles and generates owner and beneficiary statements so you can prepare your own 1040 correctly.

Technically the foreign trustee is supposed to prepare and file Form 3520-A. In reality, a Canadian bank running your TFSA or a UK pension administrator has no obligation to comply with US tax law, no US Employer Identification Number, and no interest in filing IRS paperwork. So the Code drops the liability on you. If the trust does not file, you complete a Substitute Form 3520-A yourself, as best you can, and attach it to your Form 3520.

The logistics trap unwary filers repeatedly:

1. The deadlines do not match. Form 3520-A is due the 15th day of the 3rd month after the trust's year end, March 15 for a calendar-year trust, a full month before your 1040. For a UK trust running on the UK tax year ending April 5, the 3520-A is due July 15.
2. Your 1040 extension does not extend it. A Form 4868 extension does nothing for the 3520-A; you need a separate Form 7004 filed by the original March 15 deadline.
3. The substitute follows a different clock. A Substitute 3520-A attached to your 3520 uses the later 3520 deadlines instead.
4. It needs the trust's EIN. Form 3520-A must be filed with the foreign trust's Employer Identification Number, not your Social Security Number or ITIN. If the trust has no EIN, you apply for one on its behalf.

The Penalties: 35%, 5%, and How Foreign Trust Penalties Compound

Understanding foreign trust penalties starts with one fact: they are calculated on the value of the assets or transfers, not on the tax you failed to pay. You can owe nothing and still face a life-altering bill.

Under IRC Section 6677, the penalties for missing Form 3520 or 3520-A break down like this:

• 35% on transfers and distributions. Failing to report a transfer into a foreign trust (Part I) or a distribution out of one (Part III) triggers a penalty equal to the greater of 10,000 dollars or 35% of the gross value involved. If Marcus receives a 1 million dollar distribution from a family trust and forgets to file, that is an immediate 350,000 dollar penalty, even though the money was post-tax capital that generated zero US income tax.
• 5% on trust assets for ownership failures. Failing to report ownership (Part II) or failing to ensure the trust files its 3520-A triggers a penalty equal to the greater of 10,000 dollars or 5% of the trust assets treated as yours at year end. The IRS used to stack this 5% penalty twice for a single ownership failure, but recent litigation and updated guidance generally cap it at a single 5%. The 10,000 dollar floor still lands hard on small accounts, which is how a 15,000 dollar TFSA can generate a 10,000 dollar penalty.
• Continuation penalties. If the problem is not fixed within 90 days after the IRS mails a formal notice, an extra 10,000 dollars piles on for every 30-day period the failure continues, capped only by the gross reportable amount.

Foreign gift failures under Part IV run on a separate track. Under IRC Section 6039F, missing a reportable foreign gift costs 5% of the gift value for each month you are late, up to a maximum of 25%.

These are also "assessable penalties," meaning the IRS can levy them immediately without first issuing a Statutory Notice of Deficiency or a Tax Court window. Historically the Ogden service center would generate an automatic penalty notice the moment a late form was processed, ignoring any explanation attached, and leave filers to either pay first and sue for a refund or fight through appeals while collections circled. That is exactly the scenario the recent policy changes described below were meant to address.

Gifts and Inheritances From Foreign Persons

You do not need a trust at all to get pulled into Form 3520. Part IV catches the receipt of large gifts and inheritances from foreign persons, and this is where a lot of otherwise careful people get blindsided.

The distinction that matters is giving versus receiving. If you, a US person, give wealth to a foreign person and it exceeds the annual exclusion (19,000 dollars for 2025 and 2026), you file Form 709, the gift tax return, which is a separate world entirely. Receiving works differently. When a foreign person gives you a gift, the foreign donor has no US tax obligation and you owe no US income or gift tax on it. But if the total from foreign individuals or estates exceeds 100,000 dollars in a year, you must report it on Part IV purely for informational tracking. Gifts from related foreign parties get aggregated toward that threshold, so three separate 40,000 dollar wires from your parents count as one 120,000 dollar reportable event.

A few details that catch people:

• The corporate threshold is far lower. Gifts from foreign corporations or partnerships trigger reporting at 20,116 dollars for 2025 and 2026, adjusted annually for inflation, not 100,000 dollars.
• Inheritances count as gifts here. Inheriting more than 100,000 dollars from a non-resident parent's estate abroad is treated just like an inter vivos gift and goes on Part IV.
• Tuition and medical payments made directly to the institution are excluded. A foreign relative paying your university or hospital directly is not a reportable foreign gift.

A missed foreign inheritance is not a tax problem. It is a reporting problem, and the reporting penalty can eat a real fraction of the money received.

How to Fix It If You Have Already Missed Years

The remediation paths below exist for exactly this situation. First rule: do not attempt a "quiet disclosure," meaning do not just mail in late forms with no explanation and hope they slip through. The IRS treats that as an evasion tactic, and its systems are tuned to flag quiet submissions for maximum penalties.

The right pathway depends on one question: did you also underreport income, or did you only miss the forms?

• You reported all the income but missed the forms. This is the Delinquent International Information Return Submission Procedures, or DIIRSP. You file the delinquent 3520 and 3520-A with a detailed reasonable cause statement attached to each. Since November 2020 this is no longer an automatic waiver; it is a formal channel to request reasonable cause abatement, and the 2024 and 2025 policy changes mean your statement now actually gets read before any penalty is assessed.
• You also underreported income. If you never reported the internal gains of a TFSA or the distributions from a super fund, DIIRSP is not available. You go to the Streamlined Filing Compliance Procedures instead, certifying under penalty of perjury that your conduct was non-willful. Non-residents use the Streamlined Foreign Offshore Procedures and can get a full waiver of the 3520 and offshore penalties. US residents use the Streamlined Domestic Offshore Procedures and pay a single 5% penalty on the foreign asset base, a global settlement that shields against the 35% 3520 penalties that would otherwise apply. Our detailed walkthrough of the streamlined filing procedures covers eligibility and the non-willful certification in depth.
• Your conduct was actually willful. If you intentionally hid trusts or gifts, the Streamlined programs are off limits, and filing a false non-willful certification is itself tax fraud with criminal exposure. The path here is the Voluntary Disclosure Practice, which carries heavy civil penalties but protects against prosecution.

The foundation under all of this is reasonable cause. Under the Internal Revenue Manual, penalties are not asserted if you exercised "ordinary business care and prudence" and still could not file on time. A reasonable cause statement is not an apology letter. It is a documented legal narrative, signed under penalties of perjury, addressing factors like the genuine complexity of the law, reasonable reliance on a professional you gave complete information to, a clean prior compliance history, and any inability to pry records out of an uncooperative foreign trustee.

Two developments have shifted the ground in the filer's favor. In late 2024 the IRS ended the automatic, systemic assessment of penalties on late-filed 3520 and 3520-A forms, so examiners must now read the reasonable cause statement before assessing anything. That change followed data showing the IRS had been abating 67% of these automatic penalties, representing 78% of the dollars, once taxpayers finally got to explain themselves. Separately, in Huang v. United States, a taxpayer who relied on incorrect TurboTax guidance about foreign gifts survived a motion to dismiss on a tax software defense, which courts had historically rejected outright. The burden still sits with the taxpayer at trial, but the door is no longer closed.

So What Does All of This Mean for You

Ordinary financial life abroad generates extraordinary US reporting obligations, and the overlap is where people get hurt. A single Canadian TFSA worth 15,000 dollars can require an FBAR, a Form 8938, a Form 3520, and a Form 3520-A, all describing the same account, with penalties attached to each. If a foreign trust you benefit from holds shares in a foreign company, the attribution rules of IRC Section 958(a)(2) can pull you into Form 5471 territory, with its own 10,000 dollar penalty structure, purely because you are a beneficiary.

The order of operations is what protects you. First, classify every foreign account you hold before the IRS does it for you, since the Court and Control tests decide whether something you think of as a savings account is actually a trust. Second, if gaps turn up, document reasonable cause while the facts are fresh rather than reconstructing it under audit pressure. Third, reconcile your numbers identically across every form, since mismatches between your 3520, your 8938, and your FBAR are a primary audit trigger for international examiners. This is precisely the kind of coordination our cross-border tax and structuring services are built around, and getting the classification right at the outset is far cheaper than remediation after a penalty notice lands.