Reporting Foreign Trusts - Requirements | IRS Reporting Foreign Trusts - Golding & Golding

Reporting Foreign Trusts – Requirements | IRS Reporting Foreign Trusts – Krantz Attorneys

Reporting Foreign Trusts – Requirements | IRS Reporting Foreign Trusts

Reporting Foreign Trusts: The responsibilities (and penalties) for reporting foreign trusts may fall on the shoulders of the Trustee, Grantor, or Beneficiary of a foreign trust.

Reporting Foreign Trusts 

The main requirement is the filing of IRS 3520-A.

Foreign Trust reporting generally requires the help of an International Tax Attorney — and preferably a Board-Certified Tax Law Specialist, due to complex issues involving:

IRS Foreign Trust Requirements

Common Questions we receive about reporting Foreign Trusts:

What is a Foreign Trust?

To the IRS, a Foreign Trust is any trust that is not a U.S. Trust. It generally means that a foreign jurisdiction or person has control, management powers, and/or or authority over the trust.

What make a Foreign Trust, Foreign?

It can be for various different reasons, but generally the main reason is that primary control for management and legal purposes is with a non-U.S. jurisdiction.

What is Foreign Trust Taxation?

Foreign Trust Taxation is different than Foreign Trust Reporting. The taxation of the trust involves how income attributed to the trust is taxed. This article focuses on the reporting of the Foreign Trust to the IRS.

What is Foreign Trust Form 3520-A?

Form 3520-A is the main (but not the only) form used to report foreign trust information to the IRS.

What is the Foreign Trust Control Test?

The Foreign Trust Control Test is used to analyze the trust to determine if it is considered a U.S. Trust or Foreign Trust. It is very important, because the tax and reporting rules are vastly different between domestic and foreign trusts.

What is a Foreign Trust Bank Account?

A foreign trust bank account is a bank account associated with a Foreign Trust. The foreign trust bank account may have its own set of reporting requirements distinct from the Trust (FBAR, FATCA Form 8938, PFIC, etc.)

What is a Foreign Trust Definition?

A Foreign Trust is defined as any trust that is not a U.S. trust (see below).

Can You Provide a Foreign Trust Example?

Here is an example of a foreign trust: David is a U.S. beneficiary of a trust that was formed in Switzerland. The trusts corpus and income is all generated in Switzerland, and the trustee and grantor are both Swiss. The trust was formed under the laws of Switzerland, and subject to the laws of Switzerland.  

Presumably, this would be held as a “Foreign Trust.”

Who has to report a Foreign Trust?

The Trustee is supposed to report to the IRS on behalf of the trust, but even if the trustee does not report, the beneficiary and/or grantor may be held liable for fines and penalties.

What if I did not Report the Foreign Trust?

You may be subject to extensive (and unfairly high) Foreign Trust fines and penalties.

Is there a Foreign Trust Amnesty Program?

Yes. We summarize the different amnesty options below for you.

Foreign Trust Rules and Requirements (More Detailed Summary)

If you are a U.S. Owner, Trustee or Beneficiary of a Foreign Trust, then reporting your foreign trust timely on IRS Form 3520-A is crucial. Form 3520-A (Information on Foreign Trust activities) for Reporting of Foreign Trusts is an IRS important International Tax Form.

What is a Foreign Trust?

The IRS doesn’t like to nail down specifics. It defines a foreign trust as (drumroll please)


“A foreign trust is any trust other than a domestic trust


Nice, right?

A domestic trust is any trust if:

1. A court within the United States is able to exercise primary supervision over the administration of the trust, and

2.  One or more U.S. persons have the authority to control all substantial decisions of the trust


First IRS Rule & Requirement: Determine if it is a Domestic Trust

First, you have to determine if it is a domestic trust.

If it is not a domestic trust then by default it is a foreign trust. While there are definitely times in which you can argue semantics (and probably win) if not drag the matter out for a very long time through the court system, if the trust is located overseas, or the property is comprised of foreign property, and/or the owner is a non-US person, then most likely you will be required to report the trust.

Second IRS Rule & Requirement: Are a U.S. Person Owner of a Foreign Trust

The IRS provides the following definition

A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).


Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.”

How do I Report a Foreign Trust?

There are two main forms you file to report a foreign trust:

  • Form 3520
  • Form 3520-A

While the Form 3520 is generally not very complicated if it is to report the receipt of a gift, inheritance or trust distribution from a Foreign Person, the Form 3520-A is much more complicated.

What is the Requirement to File Form 3520 for a Foreign Trust?

Generally, it is the beneficiary of the Foreign Trust who files the form.

IRS Form 3520 provides:

You are a U.S. owner of all or any portion of a foreign trust at any time during the tax year. Complete all applicable identifying information requested below and Part II of the form and see the instructions for Part II. You may also need to complete Part III.


See the instructions for Part III.

Who Files the Form 3520-A for a Foreign Trust?


While it is the Trustee who is supposed to file the form, the beneficiary and grantor can be held responsible if the form is not filed.


A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).


Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.


If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A for the foreign trust to the U.S. owner’s Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See Part II, line 22, of the Instructions for Form 3520. Otherwise, the U.S. owner may be liable for a penalty.

The IRS has Increased Foreign Trust Reporting Enforcement

Foreign Trust compliance (foreign grantor trusts and non-grantor foreign trusts) is on the rise. It has become a key enforcement priority, with an emphasis on foreign trust tax and income.

The reason why the disclosure of trusts that are foreign is so important, is because of the severe fines and penalties against U.S. foreign trust owners who are non-compliant foreign trust rules and requirements. 

Reporting foreign trusts may involve several “moving parts,” including trustee reporting, agent reporting, beneficiary reporting, etc.

Foreign Trust Reporting (An Example)

An example we deal with often will be when we have a client based in the United States, who has a multi-million dollar funded foreign trust. Usually, the client will have utilized a trust company that may have ‘baited’ the client into the investment.The trustee falsely implies that since it is a foreign trust it does not need to be reported in the United States.

Thereafter, the US owner learns of the reporting requirement (3520, 3520-A, FBAR, Form 8938, 8621) and realizes that the trustee never filed the form. This is a nonissue to the IRS, and the owner still must file the form(s).

Common Issues involving Reporting Foreign Trusts

We receive many questions on issues involving reporting foreign trusts, including:

What is Foreign Trust Accounting?

Depending on how active or passive your foreign trust is, chances are there will be some accounting that needs to be handled in order for the trust to be properly reported. For example, assets, equity, and liabilities will need to be detailed in the form 3520-A.

The Internal Revenue Service will want to be aware of which Beneficiaries or Trustees received what distribution (if any), and especially, whether taxes have already been paid either abroad or in the United States.

Generally, trust distributions that are income will be reported by the grantor as income in a foreign trust scenario. The purpose is to avoid the deep pocket grantor from artificially reducing his or her tax liability by distributing money to his children or other family members which would presumably be taxed at a lower tax bracket than Mr. or Mrs. Deep Pockets.

What’s the Difference Between a Grantor Trust vs. Non-Grantor Trusts

Whether or not a trust is a grantor trust is well beyond the scope of this article. It is important to keep in mind that the IRS will default to a trust being a grantor trust because that will increase the amount of tax the IRS can recover. To be fair,  most foreign trusts are most likely going to be grantor trusts.

A typical scenario would be the owner of the trust maintains control or at least the purse-strings of the trust. No matter how many layers of rhetoric the grantor will try to place between himself or herself and the beneficiaries, if in reality the grantor is making the final decision (even if through a conduit in which he or she has some control) it is probably going to be a grantor trust.

Foreign Trust Penalties

The IRS loves penalties — especially Offshore Penalties. 

If you are high-net worth individual with a substantial amount of money overseas in a foreign trust, you must get compliant.

Here’s why:

The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c).


The U.S. owner is subject to an additional separate penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the U.S. owner (a) fails to file a timely Form 3520 (Part II), or (b) fails to furnish all of the information required by section 6048(b) or includes incorrect information.

Additional Penalties

See section 6677(a) through (c). Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677. Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return. Penalties may also be imposed under section 6662(j) for undisclosed foreign financial asset understatements. Reasonable cause. No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

What if I am Out of IRS Compliance?

When you have not met your prior year IRS foreign trust, asset or account compliance obligations, your best options are either the traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

Krantz Attorneys, A PLC

We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

International Tax Lawyers - Krantz Attorneys, A PLC

International Tax Lawyers - Krantz Attorneys, A PLC

Krantz Attorneys: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Ezra Krantz is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Ezra and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

Ezra holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Krantz's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
International Tax Lawyers - Krantz Attorneys, A PLC

Latest posts by International Tax Lawyers - Krantz Attorneys, A PLC (see all)