The 2023 tax filing season is underway, and taxpayers with foreign activities need to be aware of certain international information return obligations, particularly the IRS Form 3520. This form requires U.S. persons, including citizens, green card holders, and certain residents, to report transactions with foreign trusts, gifts, and inheritances.
For those settling funds or property to a foreign trust, or receiving gifts or inheritances from foreign sources, filing Form 3520 is mandatory. Executors of estates with foreign trust involvement must also file this form on behalf of deceased U.S. individuals.
Failure to file Form 3520 accurately and on time can lead to significant civil penalties. The penalties vary depending on the transaction, with potential fines reaching up to 35% of the amount transferred to or received from a foreign trust.
Taxpayers who miss the filing deadline should explore options to mitigate penalties. The IRS offers programs like the Streamlined Filing Compliance Procedures, which can help reduce or eliminate penalties for eligible individuals. Those not qualifying for IRS programs can present a reasonable cause defense to potentially avoid or lessen penalties.
It is crucial for taxpayers to act promptly in addressing Form 3520 obligations to avoid penalties. Seeking assistance from tax professionals or exploring available IRS programs can help taxpayers navigate these reporting requirements effectively.
