AICPA Makes Useful Recommendations For International Forms 3520/3520

The American Institute of CPAs (AICPA) submitted comment letters to the IRS requesting improvements be made to two international tax returns pertaining to foreign trusts.

The AICPA requested that the IRS update, add to, and clarify Form 3520 and Form 3520-A instructions and allow for e-filing of both forms, clarification of the need for employer identification numbers, and inclusion of an exemption from both forms for foreign pensions where deferral of tax on earnings is available under a tax treaty.

Many taxpayers struggle with Forms 3520 and 3520-A and file them incorrectly.

Even worse, our clients have received many Form 3520 penalties over the years, and we have successfully appealed them, but Forms 3520 and 3520-A are unfortunately very complex. I applaud the AICPA for the recommendations and hope the recommendations will be seriously considered for implementation.

The AICPA recommendations are below:

We request that the Department of the Treasury (“Treasury”) and IRS consider the following recommendations regarding the Form 3520 and Form 3520-A instructions.

1. In cases where a foreign trust did not appoint a U.S. agent, update Form 3520 instructions to agree with the directions provided on Form 3520, line 3, and Part I, Schedule B, lines 15 – 18.

2. Add to the instructions and to the Form 3520; Part III – for Line 29 – “If you are filing Form 3520 with respect to a foreign nongrantor trust, check N/A,” and for Line 30 – “If you are filing Form 3520 with respect to a foreign grantor trust, check N/A.”

3. Add to the instructions for Form 3520-A for Part III, Balance Sheet, a sentence such as “It is not necessary or required to reconcile any differences between the book and tax basis of assets and liabilities.” Also, add a sentence to clarify that it is not necessary to reconcile changes in the fair market value of assets and liabilities between the beginning and end of the tax year.

4. For Form 3520, clarify that if a U.S. person required to file a Form 3520 has filed their Form 1040, U.S. Individual Income Tax Return, on or before the original due date, it is still possible to extend the due date for filing a Form 3520 by filing an extension (in the case of an individual, a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) on or before the original due date of the U.S. person’s return (April 15 in the case of an individual).

5. Clarify that a Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, can be electronically filed to extend a Form 3520-A, and a Form 4868 can be electronically filed to extend a Form 3520.

6. In cases where a substitute Form 3520-A will be filed, clarify that no extension for Form 3520A needs to be filed. Also, state that it is acceptable, but not required, if a separate extension for Form 3520-A is filed in cases where a substitute Form 3520-A is filed.

7. Make additional AICPA recommended changes to the Form 3520 and Form 3520-A and instructions,1 including:

▪ Allow e-filing of the Form 3520 and Form 3520-A, which could reduce the number of returns incorrectly being assessed late filing penalties.

▪ Make clear in the instructions to the Form 3520 when an employer identification number (EIN) is required. For example, clarify whether a foreign non-grantor trust needs to obtain an EIN if it has U.S. beneficiaries but otherwise does not derive any U.S. source income or have any connections to the United States.

▪ Provide that the U.S. agent form only needs to be attached to Form 3520 and Form 3520A every three years unless there has been a change. ▪ Include an exemption from Form 3520 and Form 3520-A reporting for foreign pensions where deferral of tax on earnings is available under a tax treaty, as in the case of Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. See Treas. Reg. § 1.1298-1(c)(4).

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