By Caroline Rule and Jas Singh
The Journal of Tax Practice & Procedure
Summer 2021 Issue
The IRS has begun systematically imposing late-filing penalties on substitute Forms 3520-A even when they have been filed on time. This new mistaken practice forces a taxpayer who does not owe a late-filing penalty to file a protest or a request for collection due process (“CDP”) with the IRS Independent Office of Appeals (“IRS Appeals”) and suffer the attendant unnecessary financial and emotional toll.
Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, must be filed by any foreign trust when a U.S. person is treated as an owner of any portion of the trust (“U.S. owner” or “taxpayer”). A copy of Form 3520-A is attached to a U.S owner’s Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, which is due at the same time as the U.S. owner’s annual federal income tax return but need not be attached to the return
Form 3520-A is required in accordance with Code Sec. 6048(b), which provides:
If, at any time during any taxable year of a United States person, such person is treated as the owner of any portion of a foreign trust … such person shall submit such information as the Secretary may prescribe with respect to such trust for such year and shall be responsible to ensure that—
(A) such trust makes a return for such year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe, and
(B) such trust furnishes such information as the Secretary may prescribe to each United States person (i) who is treated as the owner of any portion of such trust or (ii) who receives (directly or indirectly) any distribution from the trust.
The statute seemingly places the onus on the U.S. owner to make sure that the foreign trust files a Form 3520-A and provides a copy to the U.S. owner, and does not mention a substitute Form 3520-A.
The IRS’s Instructions for Form 3520, however, first ask if the foreign trust filed a Form 3520-A for the current year, and if not, instruct that the U.S. owner should “ to the best of your ability, complete and attach a Substitute Form 3520-A for the foreign trust.” The Form 3520 instructions also provide that, if a foreign trust does not file a Form 3520-A, “a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 … is considered timely filed.” The Internal Revenue Manual (“IRM”) confirms that “[i]f a foreign trust fails to file a Form 3520-A, the U.S. owner may complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520.”
To file a substitute Form 3520-A, the U.S. owner must check the “Substitute Form 3520-A” box on Form 3520-A, and must sign and date the return (normally the foreign trustee would sign a Form 3520-A) and provide their name and taxpayer identification number in the signature box.
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