But first — what is IRS Form 3520-A?
Technically speaking, a Form 3520-A is an annual informational return of a foreign trust with a US owner. But the form has a much more common application most taxpayers are not aware of.
The title of this form throws most people off. They think — "I don’t have a domestic trust let alone a foreign trust. So how can I possibly have a Form 3520-A requirement?"
The answer is that many foreign retirement plans, pensions and social security analogues are considered by the US tax law to be foreign trusts. In fact, 90% of the 3520-A forms that our tax firm files are all for foreign pensions.
How can my foreign pension be a trust?
The law behind Form 3520-A could be a lot clearer. A lot clearer. Consider, the instructions for Form 3520-A fail to even mention the words “foreign pension” or “foreign retirement” anywhere. While Schedule B mentions Form 3520, but completely fails to mention Form 3520-A. So if have missed filing this form, you are not alone.
What if I got hit or my client got hit with a Form 3520-A penalty?
The IRS can assess a $10,000 Form 3520-A penalty so easily it can be done automatically. We have seen this for Form 5471s as well forms that are actually filed correctly!
Many US tax practioners are baffled — how could the IRS make such a huge mistakes?
It is no surprise to us. International tax compliance is so difficult the IRS can not adminster the law. It is impossible for them to do so. Once you understand the complexities of the contraints of very cold and indifferent IRS , it is quite easy to see how the IRS could mess this up so bad. But still — their mess is certainly something that feels personal to you.
The IRS has an incredibly difficult time following its own procedures, and Form 3520-A penalties are no exception. We routinely need to correct an IRS that fails to mitigate or improperly assesses penalties of a taxpayer who has gone through a streamlined disclosure program. If you or your cleints needs help with Form 3520-A penalty – we invite you to contact us to see if we can assist – in a cost effective manner.
Form 3520-A: What is not in dispute
The IRS often takes the position that a foreign pension is something known as a grantor trust or an employee’s trust. The IRS’s treatment is not entirely consistent, and ignorance surrounding foreign pensions abounds, so you will likely find differing advice. But we are not here to tell you what you will get away with, but rather, what can happen to you if you don’t file a Form 3520-A.
When is a Form 3520-A due? Do I attach it to my tax return? Do I have to file an extension?
Form 3520A is due 3 months and 15 days after the end of the tax year for the trust/pension. This usually makes the Form 3520-A due on March 15th – a month before your tax return is due if you live in the US and three months before your tax return is due if you live overseas.
If you file an extension for your tax return, this extension does NOT carry over to Form 3520-A. An extension of time to file Form 3520 A (including the statements on pages 3 through 5) may be granted by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
What will happen if I don’t file a Form 3520-A?
You could get away with it. But, if you are detected by the IRS, you could also be looking at a $10,000 penalty for each Form 3520-A you did not file. If unfiled or improperly filed, the IRS can examine your entire Form 1040 indefinitely. That’s right, the IRS can audit you back to when you first started this retirement plan if an Form 3520-A was required but not filed. Even if that was 20 years ago.
Suppose an American moved to Australia in 1999, with contributions to a superannuation starting the same year. If a Form 3520-A was required, or not filed or improperly filed, that is 20 $10,000 penalties the IRS could assess, for a total of $200,000 in penalties alone. In the last three years, we have seen the IRS begin to be assess aggressive penalties – so aggressive many taxpayers and tax professionals find themselves shocked and stunned.
There is another 3520-A penalty the IRS can assess. Yet it is as of today, it’s rare to see.The IRS can impose a penalty of 5% of the retirement plan’s value. So if you have say a Swiss pension valued at $1 million USD, you can be hit with additionally penalties including a $50,000 penalty for not filing a Form 3520-A. And htis can be assessed multiple times. But this type of penalty is not as common as it can not be automatically assessed, unlike the $10,000 Form 3520-A penalty which often can be.
What should I do if I think I might have a Form 3520-A issue? That is what if I think the IRS might be right?
Form 3520-A is hardly the only international form that taxpayers are missing or have filled out incorrectly. International tax compliance is nothing but a series of clever traps. Again, simply contact us to talk about your current situation – there can be a lot of risk you are walking around with that you not aware of an we really want to see if we can help bring some clarity and confidence to your sitauation.