Knowledge is protection when the IRS is involved. I'm Darrin Mish, a tax attorney in Tampa with 32 years of experience representing taxpayers nationwide. Here's what I want you to understand.
The Form Almost Nobody Hears About Until It Is Too Late
Form 3520-A is the annual information return of a foreign trust with a U.S. owner. It is one of the most expensive forms to miss in the tax code, and almost no taxpayer learns about it before missing it. The CPA who prepares your 1040 may not file it. The trustee abroad almost certainly will not. The result is years of missed filings and penalties that often exceed the trust’s value.
The good news is that the penalty has a path out. The path is narrow, but it works.
What 3520-A Is and Who Files It
Form 3520-A is required for any foreign trust treated as having a U.S. owner under the grantor trust rules of IRC Sections 671 through 679. The trustee is legally responsible for filing the form. In practice, foreign trustees rarely file U.S. forms, which shifts the obligation to the U.S. owner under what is called a “substitute” Form 3520-A.
The form is due March 15 of each year for the prior calendar year. Extensions are available, but only via Form 7004 filed before the original due date.
The form reports the trust’s income, deductions, beneficiaries, and U.S. owners. It is a transparency document: the IRS wants to know what the trust holds, what it earned, and to whom it is paying out.
The Penalty Under IRC Section 6677(b)
The penalty for failing to file Form 3520-A is the greater of $10,000 or 5 percent of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of the year.
The penalty applies per year. A taxpayer who has owned a foreign trust for ten years and never filed is looking at a baseline penalty of at least $100,000 – and significantly more if the trust holds substantial assets.
The 5 percent of gross value piece is what catches large estates. A foreign trust with $4 million in assets generates a $200,000 penalty per year. Three years of nonfiling and the penalty alone is $600,000.
How the IRS Assesses 3520-A Penalties
For many years, the IRS assessed 3520-A penalties almost automatically when forms were filed late – even when the taxpayer self-corrected. The system flagged the late filing and generated the penalty notice without human review.
Court challenges have pushed back on this practice. Recent decisions have examined whether the IRS has authority to assess Section 6677 penalties without first issuing a deficiency notice. The law is unsettled in places, and some penalty assessments have been reversed on procedural grounds.
What this means for you: the penalty notice is not the final word. Procedural defenses, reasonable cause arguments, and disclosure-program protections all remain available. Do not pay a 3520-A penalty notice without analyzing the assessment.
Reasonable Cause as a Defense
Section 6677 provides that the penalty does not apply if the failure to file is due to reasonable cause and not willful neglect. The reasonable cause standard for 3520-A is the same in principle as for other information returns: the taxpayer must show that they exercised ordinary business care and prudence and were nevertheless unable to comply.
Reasonable cause arguments that succeed often involve reliance on professional advice (where the professional was qualified and given full information), language barriers combined with the foreign trustee’s failure to provide records, or recent acquisition of the trust ownership status without notice. Arguments that fail include “my CPA did not know about it” without more, or “I did not realize the rule existed” when Schedule B or other forms put the taxpayer on notice.
The Disclosure-Program Path
If you have missed 3520-A filings, two formal paths handle the cleanup.
The Streamlined Filing Compliance Procedures cover non-willful failures. The submission includes six years of FBARs, three years of amended returns, and the back 3520-A forms. The miscellaneous offshore penalty (5 percent for U.S. residents on the highest year-end aggregate balance of unreported foreign assets in the lookback) replaces the 3520-A penalties.
The Voluntary Disclosure Practice covers willful conduct. The civil penalty structure under VDP is heavier than Streamlined but the program protects against criminal exposure.
Neither program is automatic. Eligibility turns on facts, prior IRS contact, and the nature of the noncompliance. The path matters – choosing wrong can disqualify you from both.
What If the Trustee Will Not Cooperate?
A common problem: the foreign trustee will not provide the information needed to complete 3520-A, or will not sign anything intended for U.S. tax authorities.
The substitute 3520-A solution lets the U.S. owner file the form themselves with the information they can reasonably obtain. The form has a check box for this situation. Documenting your efforts to get cooperation from the trustee is part of the reasonable cause argument if penalties are later assessed.
Some foreign trustees will provide a limited reporting package – asset list, income, distributions – without signing anything official. That is workable. The U.S. owner uses that information to complete the substitute form.
Three Steps if You Have Missed Years
First, build the records. Trust deed, beneficiary list, trustee correspondence, annual asset values, annual income and distributions. The 3520-A and any back-file analysis depend on this.
Second, evaluate willfulness honestly. Did anyone at any point have notice of the U.S. reporting obligation? Schedule B answers, prior tax return checkboxes, correspondence with U.S. advisors – all of it matters.
Third, choose the disclosure path before filing. A standalone late filing without a program can trigger automatic penalties that a disclosure program would have prevented.
Get the Penalty Off the Table
After 32 years of handling foreign trust filings, I have seen the same pattern repeatedly: a small reporting failure becomes a six-figure penalty notice because nobody addressed it the right way. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 if you have missed Form 3520-A filings. We map the exposure, pick the path, and work the penalty down.