IRS Form 3520-A Explained: The Guide for US-Based NRIs

The IRS Form 3520-A is the annual information return of a foreign trust with at least one US owner. The form reports the activity of the trust, its financial position, its US beneficiaries, and any US individual who, under the grantor trust rules of IRS sections 671-679, is an owner of any portion of the foreign trust. Considering this, if you are a US-based NRI connected to an Indian trust, you need to fill out the IRS Form 3520-A.

To avoid severe penalties and ensure compliance with the Internal Revenue Code, it is vital to understand the form and its connection to Form 3520. To help you out, this blog explains who needs to file Form 3520-A, the filing date, required details, and more. So read the blog, gather all the information, and stay compliant with US tax laws.

What is IRS Form 3520-A?

Form 3520-A is an IRS form that reports information about a foreign trust with at least one U.S. individual treated as an owner under the US grantor trust rules. For tax purposes, the form provides transparency into the activities, income, and foreign accounts of the trust during its tax year.

Generally, a foreign trust files Form 3520-A with the IRS in the US. Considering this, the foreign trust is accountable for providing the IRS with a complete picture of its income, assets, distributions, and the identity of its US owners and beneficiaries. However, if the trust does not fill out this form, the US owner should fill out the form to ensure compliance. Under the grantor trust rules and the Internal Revenue Code, this form obligation is non-negotiable.

This was all about IRS Form 3520-A. Moving further, let's know who should fill out this form in the US.

Who Should File IRS Form 3520-A in the US?

Generally, the duty to fill out the IRS Form 3520-A lies with the trustee of the foreign trust. However, if you are a US person treated as the owner of that trust, then you are accountable for ensuring the form is filed. Considering this, if the trust does not file the form, the obligation automatically shifts to you.

Here, a US person includes U.S. citizens, green card holders, and certain foreign individuals, stated as trust owners under the foreign grantor trust rules. Further, let's know when Form 3520-A applies to NRIs.

When is Form 3520-A Applicable for US-Based NRIs?

In the following situations, Form 3520-A becomes relevant to US-based NRIs:

• You are a tax resident in the US (citizen, green card holder, or someone meeting the Substantial Presence Test). Additionally, you have a family trust in India with you as a contributor or beneficiary in a way that makes you the owner.
• Your parents or relatives in India set up a family trust for asset protection or estate planning, and you, as a family member, retain a certain interest or powers in that trust.
• You transferred your assets to an Indian trust and retained a beneficial interest or control that, under US law, triggers grantor trust rules.
• You are the trustee or have decision-making authority over a foreign trust where the US grantor trust rules apply to you.

So, this was all about who needs to file the IRS Form 3520-A. Moving further, let's know the reporting requirements of the form.

What Are the Reporting Requirements of IRS Form 3520-A?

The reporting requirements of the IRS Form 3520-A are as follows:

• Complete information on the foreign trust. It includes its name, address, and taxpayer identification number (or employer identification number).
• A full account of the assets and liabilities of the foreign trust, showing the gross value at the end of the year.
• Balance sheets, income statements, and reports of foreign gifts, distributions, and contributions.
• Identification of each US person and US beneficiary treated as owner.
• The tax year of the trust, including all foreign accounts and transactions.

Further, providing wrong information or leaving sections incomplete is treated as non-compliance and leads to immediate penalties. Moving forward, let's know the filing deadline of the Form 3520-A and where to file it.

When Is Form 3520-A Due and Where to File?

The filing deadline for IRS Form 3520-A is the 15th day of the third month after the end of the tax year of the trust. It is generally March 15 for calendar-year trusts. Additionally, by filing out Form 7004, you can request a six-month extension (September 15). This extension date is different from your regular extension for the income tax return.

Further, Form 3520-A is mailed to the IRS service center specified in the form instructions. Missing the due date or late filing results in immediate penalties. These are the most difficult things to reverse in the complete international taxation system.

So, this was all about the Form 3520-A due date and where to fill out the form. Moving ahead, let's know about the grantor trust rules under the US tax laws.

What are Grantor Trust Rules Under US Tax Law?

A foreign grantor trust is a type of trust established outside the US by a US person who retains certain ownership rights or powers. Under the Internal Revenue Code Sections 671-679, a trust is considered a grantor trust if the grantor retains specific interest or powers, including:

• The power to revoke the trust and reclaim its assets
• A reversionary interest of more than 5% of the value of the trust
• Certain administrative powers, such as the ability to substitute the assets of the trust
• The right to get trust income for the benefit of the grantor or the grantor's partner

Further, if a US person puts their property into a foreign trust that has a US beneficiary, they are generally considered the owner even if they do not have specific control over it. Under section 679, this rule often surprises many US-based NRIs.

For instance, if you, as a US person, have moved your assets into a family trust in India, where any US beneficiary is involved (like yourself, your spouse, or your children), under section 679, you may be treated as the owner of that trust. Additionally, you may need to file Form 3520 (for the transfer) and Form 3520-A (for ongoing annual reporting) obligations.

These are the grantor trust rules for U.S. individuals. Moving further, let's know the difference between Form 3520 and Form 3520-A.

Difference Between Form 3520-A and Form 3520

The table below showcases the difference between Form 3520 and Form 3520-A.

The difference between 3520 and 3520-A in one line is that Form 3520 belongs to US individuals and Form 3520-A belongs to foreign trusts. Now, moving forward, let's know the consequences of failure to timely file Form 3520-A.

Consequences of Failure to Timely File Form 3520-A

The penalty structure for non-compliance with Form 3520-A is severe. Even though technically the trust is the filer, it applies to the US owner personally.

• Standard Penalty: The greater of 5% of the gross value of the portion of the assets of the trust treated as owned by the US individual or $10,000. It is assessed against the US owner if the foreign trust fails to fill out the Form 3520-A on time.
• Continued Failure: After receiving the notice from the IRS, if the person fails to resolve the issue within 90 days, additional penalties are imposed.
• Compounding Effect with Form 3520: Since failure to file Form 3520-A often coincides with related Form 3520 reporting gaps. Considering this, penalties can be imposed across both forms, creating a compliance exposure that is not appropriate to the underlying family transaction.

Further, unlike other IRS fines for Form 3520-A, there is no abatement process available. This means you cannot remove this penalty through a penalty relief petition or a reasonable-cause request. This penalty is automatic and waived rarely, even for first-time filers or US-based NRIs unaware of the requirement. Confused? Let's better understand with an example.

For instance, in 2017, Mr. A moved to the US, and in 2021, he became a green card holder. In 2010, when he was an Indian resident, his father established a family trust in Chennai, naming him and his sister as beneficiaries. The trust consists of a portfolio of Indian real estate and investments valued at about INR 4 crores.

In 2021, when Mr. A received his green card, he was unaware that he was a US beneficiary of his Indian trust, where his father was the grantor. Additionally, he retained certain powers in the trust that led to US grantor trust reporting obligations under Section 679.

This issue was discovered in 2024 when his CPA was reviewing his financial situation for tax planning. The CPA determined that Mr. A had a due filing obligation for Form 3520-A for the last three years, i.e., 2021 to 2023.

To resolve the issue, Mr. A, with the help of both his CPA and an Indian CA familiar with the structure of the trust, prepared a substitute Form 3520-A filing for the missed years. They also included Form 3520 since the trust itself could not file the returns in the US. To waive the tax obligations, they also submitted a statement explaining the situation. In the statement, he mentioned that the trust was set up before Mr. A became a US resident. He was totally unaware of any US reporting obligation, and when he found out, he corrected it.

The IRS reviewed his submission and, due to reasonable cause, waived the penalties. However, before the decision was received, his CPA stated that such an outcome is not guaranteed and depends on the specific circumstances, the quality of the documentation, and timely corrections before any IRS inquiry.

So, this was all about the consequences you face when you fail to timely file Form 3520-A. Moving ahead, let's know the common mistakes US-based NRIs should avoid.

Common Mistakes US-based NRIs Should Avoid

The common mistakes US-based NRIs should avoid are as follows:

• Not Recognizing a Family Trust as a "Foreign Trust" for US Purposes: Indian family trusts, established under Indian law, can trigger US grantor trust rules once a US person is connected as a grantor or beneficiary.
• Assuming the Trust Will Handle US Filings: Indian trustees and trust administrators generally do not have any information about Form 3520-A requirements. Considering this, automatically this responsibility falls on the US individual connected to the trust.
• Missing the March 15 Deadline: Missing the form filing deadline without an extension.
• Not Addressing Legacy Trust Structures Before Becoming a US Person: If you already know that in the future you will move to the US, and you are connected to an Indian family trust. In this situation, it is advisable to review the trust structure with cross-border tax experts. Restructuring the trust in advance can sometimes help in avoiding future US tax reporting obligations.
• Incorrect Information: Failing to report foreign accounts, gifts, or assets accurately.
• Non-Compliance with Grantor Trust Rules: For tax purposes, a misunderstanding of the classification of the foreign grantor trust.
• No Form 3520 Filed: Forgetting you need to fill out the two forms for the same year, i.e., Form 3520 and Form 3520-A.

Furthermore, avoiding these mistakes requires proper documentation and expert guidance in global taxation.

Final Thoughts

Lastly, for US-based NRIs and expats to maintain tax compliance and avoid substantial penalties, understanding and filing the Form 3520-A properly is vital. The form helps the IRS to monitor foreign gifts, trusts, and assets of the trust treated as owned by US individuals. The foreign grantor trust reporting rules apply even when there is no business income tax generated or no certain business income tax is due.

Furthermore, if you are or may be connected to a family trust in India as a grantor, beneficiary, or person with retained powers, and also a tax resident in the US, you need to file Form 3520-A. If you are looking for expert guidance in this, connect with Savetaxs. We help our clients to file Form 3520-A, Form 3520, and all associated annual information returns to stay compliant with US tax obligations.