As we go into filing season, we should be aware of certain forms and unique extension rules relevant for clients with foreign trusts or who receive gifts from foreign persons.
Some IRS international information returns (e.g., Forms 5471, 5472, 8858 and 8865) don’t need a separate extension since they’re filed with the taxpayer’s primary income tax return.
However, two forms related to foreign trusts, Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, are required to be filed separately from the income tax return of the owner and beneficiary. Many foreign pension plans are deemed to be foreign trusts and require Forms 3520 and 3520-A to be filed. However, exemptions include Canadian Registered Retirement Savings Plans (RRSPs).
U.S. owners (or executors of estates of U.S. decedents) of foreign trusts and U.S. persons receiving a large gift from a foreign person are required to file Form 3520 by April 15. U.S. beneficiaries of foreign trusts are also required to file Form 3520 in any year in which the beneficiary receives a distribution from the foreign trust. Loans and certain other transactions between foreign trusts and U.S. persons must also be reported on Form 3520. Substantial penalties apply for noncompliance.
If a taxpayer files an extension for their individual return, they will receive an automatic extension to Oct. 15 on their Form 3520. Currently, Form 3520 can’t be extended independently of Form 1040 or Form 1041. Thus, if Form 3520 can’t be filed by April 15, the taxpayer must request an extension to file Form 1040 or Form 1041 to extend the due date for filing Form 3520.
The AICPA suggested, and the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 directed, the Secretary of the Treasury to modify regulations to enable a taxpayer to extend Form 3520 separately from Form 1040. However, the Secretary and IRS haven’t yet implemented this change or updated IRS forms and instructions to reflect a separate extension. Until they make this change, to extend Form 3520, the taxpayer must extend their Form 1040 or Form 1041.
Form 3520-A is due March 15. A taxpayer can only extend it by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, separately from the Form 1040. An extension cannot be made by simply extending the due date for Form 1040. The extension is for six months until Sept. 15. Often, the taxpayer misses the March 15 deadline and the separate extension.
The AICPA has been advocating on this subject since 2003. In 2014, the AICPA advocated that the Form 3520-A due date be changed from March 15 to April 15 — with extensions — to coincide with the individual income tax return and Form 3520 filing due dates.
The penalty for failure to file Form 3520-A in a timely matter is the greater of $10,000 or 5% of the value of the portion of the trust treated as owned by the U.S. person. A foreign grantor trust with a U.S. owner must file a Form 3520-A, and it is generally filed by the trustee of the foreign trust. However, it’s ultimately the U.S. owner's responsibility to ensure that the foreign trust files Form 3520-A and furnishes the required annual statements to all U.S. owners and U.S. beneficiaries. If the trustee of the foreign trust doesn’t file Form 3520-A, the U.S. owner must file the return.
Form 1042 series (Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, and Form 1042-T, Annual Summary and Transmittal of Forms 1042S) is issued to non-residents who aren’t eligible to obtain a Form 1099. Form 1042 is an annual filing to report the taxes withheld on payments to non-residents (when not exempt by treaty).
This form is due March 15 and can be extended by filing Form 7004. The 1042-S is the non-resident version of the Form 1099 and is also due on March 15 and can be extended by filing Form 8809. The Form 1042-T is the non-resident version of Form 1096 and accompanies the paper Forms 1042-S that are being submitted. Since this form will always accompany the Form 1042-S, it has the same due date and extension procedures as Form 1042-S.
Keep these due dates and extension filing nuances in mind as you work through this filing season.