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Preparation of Form 3520
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Preparation of Form 3520

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Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is one of the most complex tax return reporting forms in the IRS international tax reporting regime. Individuals or entities who own an interest in a foreign-based trust or receive gifts, inheritances, or distributions from a foreign source are required to report these foreign “reportable events,” even if the individual or entity does not receive income from these foreign sources. A significant challenge for U.S. taxpayers is to determine whether a taxpayer qualifies as a “responsible party” for purposes of filing Form 3520.

Many individuals and entities that have a 3520 filing requirement must contend with special rules governing U.S. tax treatment of foreign gifts such as distributable net income (“DNI”) calculations. These are different for foreign trusts than domestic trusts. Individuals and entities that have a 3520 filing requirement are also subject to undistributed net income (“UNI”) rules. UNI subjects the recipient to harsh tax consequences for beneficiaries in the form of the throwback rules.” Unless the current DNI is distributed within 65 days of the tax year’s end, the “throwback rules” require the DNI to be reclassified as UNI rather than DNI rather than being treated as an addition to trust corpus. It is typically recommended that trust U.S. beneficiaries of foreign trusts begin calculating DNI early each tax year to mitigate the impact of the throwback tax. We provide tax planning advice to avoid or mitigate the impact of the throwback tax to beneficiaries of foreign trusts.

As in most U.S. tax reporting activities, extremely steep penalties apply for failure to correctly and timely file Form 3520, including a base penalty of 35 percent of the value of the reportable event. While Section 6677 provides for reasonable cause relief, the provisions to claim that relief are complex and burdensome. We have significant experience preparing IRS Form 3520s. We also contest Form 3520 penalty assessments on behalf of our clients. We have also successfully litigated 3520 penalty assessments before the United States Tax Court, U.S. Federal Court of Claims, and United States district courts.

Anthony Diosdi

Written By Anthony Diosdi

Partner

Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.

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