Foreign Trust Reporting: Form 3520 Guide

U.S. persons who have transactions with foreign trusts, receive distributions from foreign trusts, or receive large gifts from foreign persons must file Form 3520. The penalties for non-filing are among the harshest in the tax code.

What Is Form 3520 and Who Must File?

Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) must be filed by any U.S. person who:

• Created or transferred property to a foreign trust
• Received a distribution from a foreign trust
• Received aggregate gifts or bequests exceeding $100,000 from foreign individuals during the tax year
• Received gifts exceeding $20,573 (2026 threshold, per Rev. Proc. 2025-32) from foreign corporations or partnerships

Form 3520 is an information return — it does not create a tax liability on its own. However, distributions from foreign trusts may be taxable as income.

Foreign Trusts: What Counts Under IRS Rules

Under IRC section 7701(a)(31), a trust is classified as "foreign" unless both of these conditions are met:

• A U.S. court has primary supervision over the trust administration
• One or more U.S. persons control all substantial decisions of the trust

If either condition fails, the trust is foreign. This classification captures a broad range of Indian arrangements that many H-1B holders do not realize are reportable.

Indian Family Trusts and US Reporting

Several common Indian structures may be classified as foreign trusts:

• Private family trusts: Created under the Indian Trusts Act, 1882. These are typically foreign trusts for U.S. tax purposes since no U.S. court supervises them.
• Hindu Undivided Family (HUF): The IRS has not issued definitive guidance on HUFs, but many practitioners treat them as foreign trusts. If you are the Karta and a U.S. person, Form 3520-A (annual information return of the trust) may also be required.
• Employee trusts: EPF and NPS are administered by trusts. The IRS position on whether these trigger Form 3520 is unsettled, but conservative practitioners recommend filing.

Penalty Structure: 5% to 35% of Trust Value

Form 3520 penalties are calculated as a percentage of the transaction or trust value:

Filing Deadline and Extension Options

Form 3520 is due on the same date as your income tax return (April 15), including extensions. If you file Form 4868 for a 6-month extension, Form 3520 is also extended.

Important: Form 3520 must be filed separately — it cannot be attached to your Form 1040. Mail it to the IRS at the address specified in the Form 3520 instructions (different from the Form 1040 filing address).

Reasonable Cause Relief for Late Filing

If you failed to file Form 3520 and the IRS assesses penalties, you may request relief by demonstrating reasonable cause. Common reasonable cause arguments for H-1B holders:

• You were unaware that the Indian arrangement was classified as a foreign trust under U.S. tax law
• Your tax preparer did not advise you about international information reporting requirements
• You acted promptly to file once you became aware of the requirement

The IRS has a formal process for requesting penalty abatement. File a written request with supporting documentation explaining the reasonable cause. If denied, you can appeal to the IRS Independent Office of Appeals or petition the Tax Court (for assessable penalties).