Form 3520: US Expat Reporting for Foreign Trusts and Gifts

IRS Form 3520 is one of the most misunderstood — and most penalised — international information returns facing US expats in the UK. It covers two distinct obligations: reporting transactions with foreign trusts, and reporting large gifts or inheritances from foreign persons. Penalties start at 35% of the value of the transaction and can quickly dwarf the value of the asset itself.

This guide explains when Form 3520 applies, what must be reported, how UK structures such as ISAs, discretionary trusts, and pension schemes interact with these rules, and how to address past non-compliance.

What Is Form 3520?

Form 3520 — Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts — is an informational return filed separately from (but at the same time as) the US federal income tax return. It is filed with the IRS Ogden, Utah campus.

There are three main triggers for Form 3520:

• Part I: US person transferred money or property to a foreign trust
• Part II: US person is treated as owner of a foreign trust (grantor trust rules)
• Part III: US person received a distribution from a foreign trust
• Part IV: US person received a gift or bequest from a foreign person exceeding the annual threshold

Who Must File Form 3520?

The following US persons must file Form 3520:

• A US person who created or transferred money or property to a foreign trust during the tax year
• A US person who is treated as the owner of any portion of a foreign trust under the grantor trust rules (IRC Sections 671–679)
• A US person who received (directly or indirectly) any distribution from a foreign trust
• A US person who received a gift from a foreign individual or foreign estate exceeding $100,000 in total during the year
• A US person who received a gift from a foreign corporation or foreign partnership exceeding $18,567 (2024 threshold, adjusted annually)

UK Trusts and Form 3520

The UK uses trusts extensively in estate planning, inheritance arrangements, and charitable giving. Common UK trust structures that may trigger Form 3520 for US expats include:

• Discretionary trusts: If a US expat is a beneficiary of a UK family discretionary trust, any distribution received — even a nominal one — may trigger Part III reporting on Form 3520.
• Bare trusts and nominee arrangements: Depending on the facts, these may or may not be treated as trusts under US law. Analysis is required.
• Interest in possession trusts: A US beneficiary with a present entitlement to income from a UK trust will generally be treated as a grantor trust owner or must report distributions under Part III.
• Trusts established on death (testamentary trusts): Receiving assets via a UK testamentary trust is a foreign trust distribution event for Form 3520 purposes.

ISAs and Form 3520

Individual Savings Accounts (ISAs) are a specific concern for US expats. While ISAs are not trusts under UK law, the IRS has taken the position that certain ISAs — particularly those structured as unit trust ISAs — may be classified as foreign trusts for US tax purposes.

The IRS has not issued definitive guidance on ISAs, and positions vary among tax professionals. If an ISA is treated as a foreign grantor trust, the US holder may need to file both Form 3520 (for the trust itself) and Form 3520-A (the Annual Information Return of Foreign Trust With a US Owner). This is a complex area where professional advice is strongly recommended before opening or continuing to hold an ISA as a US person.

Foreign Gifts and Inheritances

Part IV of Form 3520 addresses large gifts or bequests received from foreign persons. Many US expats in the UK receive gifts or inheritances from UK family members — parents, grandparents, or other relatives. These are reportable on Form 3520 if they exceed the thresholds, even though they may not be taxable for US income tax purposes.

Key points:

• The reporting threshold for gifts from foreign individuals is currently $100,000 in aggregate per year. Individual gifts under $100,000 that together exceed this amount in a year must all be reported.
• The gift does not need to be in cash — property, shares, or other assets transferred by a UK family member count.
• Inheriting from a UK estate may be treated as a gift from a foreign estate, triggering Form 3520 reporting.
• The gift itself is generally not subject to US income tax, but failure to report it on Form 3520 triggers severe penalties.

Form 3520 Penalties

The penalties for failure to file Form 3520, or for filing incorrectly, are among the harshest in the US international tax penalty regime:

• Failure to report a transfer to a foreign trust (Part I): 35% of the gross value of the property transferred
• Failure to report as an owner of a foreign trust (Part II): 5% of the gross value of the portion of the trust treated as owned by the US person, per year
• Failure to report a distribution from a foreign trust (Part III): 35% of the distribution
• Failure to report a foreign gift (Part IV): 5% of the gift per month, up to 25% of the gift value

These penalties are automatic unless the taxpayer demonstrates reasonable cause. Reasonable cause is a high standard and must be documented carefully.

Form 3520-A: The Companion Filing

If you are treated as the owner of a foreign grantor trust under IRC Sections 671–679, the trust itself must file Form 3520-A — Annual Information Return of Foreign Trust with a US Owner. If the foreign trustee fails to file Form 3520-A, the US owner is responsible for filing a substitute Form 3520-A. The penalty for failure to file Form 3520-A is 5% of the gross value of the trust assets treated as owned by the US person.

Catching Up: Delinquent Form 3520 Filings

The IRS offers several pathways for catching up on missed Form 3520 filings:

• Streamlined Filing Compliance Procedures: Available for non-wilful failures. Requires filing amended returns for the three most recent tax years and FBARs for six years, together with a 5% miscellaneous offshore penalty (Domestic Offshore) or no offshore penalty (Foreign Offshore, if you lived outside the US). Form 3520 and Form 3520-A are filed as part of this procedure.
• Delinquent International Information Return Submission Procedures (DIIRSP): For taxpayers with no unreported income — just missed informational forms. Allows filing without penalty, subject to IRS review of the reasonable cause statement.
• Voluntary Disclosure Programme (VDP): For potentially wilful situations requiring the highest level of legal protection.

Frequently Asked Questions

Do I need to file Form 3520 if I received a UK inheritance that is not taxable?

Yes, if the inheritance came from a foreign estate and exceeded $100,000 in value during the year. The reporting obligation exists independently of any tax liability. Many US expats are surprised to learn they needed to file Form 3520 for a gift or inheritance that attracted no US income tax — the penalty is for the failure to report, not for any unpaid tax.

Is a UK ISA a foreign trust?

Potentially, depending on how the ISA is structured. Cash ISAs held directly may have a lower risk of being classified as trusts, while stocks and shares ISAs structured as unit trusts present a higher risk. The IRS has not issued a definitive ruling, and professional guidance is recommended before taking a position.

My UK parents transferred money to me as a gift. Do I need to file Form 3520?

If the total gifts from your UK parents (and all other foreign individuals) combined exceeded $100,000 in a single year, yes — you must report on Part IV of Form 3520. Gifts below this threshold do not require Form 3520 reporting, though you may have FBAR obligations if the funds were held in a foreign bank account.

When is Form 3520 due?

Form 3520 is generally due on the same date as your US income tax return — April 15 for US residents, June 15 for expats living abroad (this is an automatic extension for expats, not an election). If you file a Form 4868 extension, the Form 3520 due date is similarly extended to October 15. However, Form 3520 is filed separately from Form 1040 — it is mailed directly to the IRS Ogden campus, not attached to the tax return.

Can penalties be waived?

Yes, with proper documentation of reasonable cause. Reasonable cause requires showing that despite exercising ordinary business care and prudence, you were unable to comply with the requirement, or that you were unaware of the requirement and that unawareness was reasonable given the circumstances. The IRS takes a strict approach; vague statements of not knowing about the form are generally insufficient without supporting facts.

Speak to a Cross-Border Tax Specialist

Form 3520 situations — whether involving UK family trusts, ISAs, inheritances, or missed filings — require careful analysis and professional handling. Incorrect or late filings can trigger penalties that far exceed the value of the asset or gift involved.

Our cross-border tax team works exclusively on US-UK tax matters and can assess your Form 3520 obligations, help you catch up on missed filings through the appropriate IRS procedure, and protect you from unnecessary penalties. Contact us today for a consultation.