Difference Between Form 3520 and 3520-A: Complete Guide for NRIs

For NRIs living in the US, Indian gifts, inheritances, and family trusts often create unexpected US tax reporting obligations. Among these, the most misunderstood requirements are IRS Form 3520 and Form 3520-A. Both forms are associated with foreign trusts, but are used for different purposes. Considering this, filing the wrong form or failing to file together can result in significant IRS penalties even when you do not owe any tax.

Further, understanding the difference between Form 3520 and 3520-A is vital if you have received a large gift from India, you are a beneficiary of a foreign trust, or are considered the owner of a trust under US tax laws. To help you out, this blog provides you with complete information about both forms and explains the difference between them. So read on and resolve all your doubts.

Why Are US Individuals Often Confused Between Form 3520 and 3520-A?

The confusion of US individuals is understandable between the two forms. This is because both deal with foreign trusts, file information returns, and come with the steepest penalty structures of the IRS for late or incomplete filing. However, they answer different questions:

• Form 3520 asks: What did you receive or do involving foreign money or a foreign trust as a US person?
• Form 3520-A asks: What does the foreign trust itself own and earn?

In simple terms, one form is about your side of the transaction while the other form provides the financial picture of the foreign trust.

This is why US individuals often get confused between Forms 3520 and 3520-A. Moving ahead, to better understand the difference between these, let's do a side-by-side comparison of the forms.

Form 3520 vs. Form 3520-A: Side-by-Side Comparison

Here are some of the core differences between Form 3520 and 3520-A to keep in mind:

Purpose

The purpose of both forms is as follows:

• Form 3520 reports foreign gifts, inheritances, and transactions with a foreign trust, i.e., your relationship with the trust or you are receiving money.
• Form 3520-A reports the financial details of the trust for the financial year, including its assets, distributions to US beneficiaries, and income.

Who Must File the Form?

Here is all about who should fill out the form:

• Form 3520 is filed by the US person, i.e., an individual who received the gift, made a transfer, or has a beneficiary interest or ownership in a foreign trust.
• Form 3520-A is filed by the foreign trust itself. In case the trust fails to fill out the form, the US owner of the trust can file the form on its behalf. Considering this, the US owner should submit a "substitute" Form 3520-A with their own Form 3520 to avoid penalties.

What Must be Reported?

The table below shows what information should be reported in both forms:

Filing Deadline

The filing deadline for both forms is as follows:

• Form 3520 follows your personal US tax return timeline. Considering this, it is due on April 15 with an automatic extension until October 15 if you file Form 4868 for your individual return. US taxpayers living outside the country get an automatic two-month extension to June 15.
• Form 3520-A is filled out one complete month earlier than Form 3520, March 15, with an extension available till 15 September via Form 7004.

IRS Penalties

This is where the two forms sharply diverge and where your real money is at stake:

• Form 3520 Penalties
• Part I (Transfers): 35% of the total value of transferred property
• Part III (Distributions): 35% of the total value of the distribution
• Part IV (Foreign Gifts): 5% of the gift value per month, up to 25% maximum
• A single missed filing, including a $500,000 trust distribution, can result in a $175,000 penalty even if you do not owe any taxes on the underlying transaction.
• Form 3520-A Penalties
• Initial: $10,000 per year, per trust- assessed automatically
• Continuation: Failure to file Form 3520-A may result in a 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, unless reasonable cause applies.

The IRS penalties apply even if you owed zero tax on the underlying transactions. The IRS provides relief for "reasonable reason," but it has to be requested and documented properly. Although a $10,000 penalty may appear modest compared to certain Form 3520 penalties, the statutory 5% penalty based on the applicable trust assets can become substantial for larger trusts.

When Do You Need Form 3520, Form 3520-A or Both?

Here is all the information about when you need Form 3520, Form 3520-A, or both:

• Received a gift or inheritance from a foreign relative or estate over $100,000: Form 3520
• Under grantor trust rules, you are the owner of a foreign trust: Form 3520 and Form 3520-A
• Received a distribution from a foreign trust as a beneficiary: Generally, file Form 3520. Form 3520-A is the responsibility of the foreign trust or, if applicable, the U.S. owner of the trust.
• You are both an owner and a beneficiary of the same foreign trust: As per your situation, both forms apply to you.

This was all about a side-by-side comparison between the two forms. Moving further, to get a better idea, let's know some common scenarios where filing of Form 3520 and Form 3520-A is necessary.

Common NRI Scenarios Explained

Here are some of the common scenarios where NRIs living in the US need to fill out Form 3520 and Form 3520-A:

Receiving a Foreign Gift

Ananay, a green card holder living in California, received INR 1.1 crore (roughly $130,000) from her parents living in Delhi to help with a home down payment in the US. Here, no trust was included. It was a family gift to help her. However, as the amount was more than the $100,000 threshold limit for foreign gifts, she needed to file Form 3520 with her US income tax return and report this amount under the foreign gift section. Although she does not owe any tax, skipping the filing would result in a 5% penalty of the gift value per month.

Owning a Foreign Trust

If you have contributed to or set up a trust structure in India, sometimes done for estate planning, under the grantor trust rules, you are considered the owner of it. Considering this, you need to file Form 3520 to report the transfer, and your trust needs to provide its financial information in the Form 3520-A.

Receiving a Distribution from a Foreign Trust

If you are a beneficiary owner of a foreign trust and it pays out property or money to you, you need to fill out Form 3520. Considering this, mention the distribution on Form 3520, and your trust needs to separately file its own Form 3520-A.

Being Both a Trust Owner and Beneficiary

Some NRIs living in the US find themselves in both roles. For example, if under the U.S. grantor trust rules you are treated as the owner of a foreign trust and also receive distributions from it, both forms are generally relevant. In this scenario, for them both forms are generally relevant every year for them. Considering this, Form 3520 covers your role and any distributions, and Form 3520-A mentions the trust's own reporting.

These are some of the common scenarios where an NRI living in the US needs to file Form 3520 and Form 3520-A. Moving forward, let's know what happens if you file the wrong form.

What Happens If the Wrong Form Is Filed?

Filing out the wrong form or filing only one form when both are required does not reset the filing time for you. The IRS treats the correct form as still outstanding and imposes penalties for the missing filing.

Considering this, if you find out a mistake, the general approach is to file the correct or missing form as soon as possible, attach a statement explaining your circumstances, and consider a reasonable cause request if the delay was not willful. To better understand this situation, it is advisable to take the help of a US tax expert.

So this is what happens if you file the wrong form. Moving ahead, let's know the common compliance mistakes that NRIs should avoid.

Common Compliance Mistakes NRIs Should Avoid

The common compliance mistakes that NRIs should avoid are as follows:

• Assuming a gift under $100,000 from one relative does not need foreign gift reporting. Considering this, if in the same financial year you receive $60,000 from your mother and $50,000 from your father, you need to report this in the IRS Form 3520 as it crosses the threshold limit.
• Missing the IRS Form 3520-A deadline, i.e., March 15, while tracking the April 15 personal tax return date.
• Not knowing that a foreign pension or family trust structure back home counts as a "foreign trust" under the US tax laws.
• Relying on a foreign trustee to file Form 3520-A without confirming it and facing the IRS penalties.
• Treating Form 3520 and 3520-A as tax forms rather than information returns, regardless of no due tax, but the penalty exposure exists for missing the filing.

These are some of the compliance mistakes that NRIs should avoid.

Final Thoughts

Lastly, to stay compliant with US tax laws, it is vital to understand the difference between Form 3520 and Form 3520-A. Beyond filing the forms correctly, thoughful planning is needed around how foreign gifts, trusts, and cross-border assets are structured from the start. With the right approach, you may be able to reduce complexity, avoid unnecessary US reporting obligations, and limit your tax exposure.

Further, at Savetaxs, we can help you evaluate your current structure, determine risks, and make strategies that match compliance with your estate and broader financial planning. Contact us today for US tax assistance.