Form 3520-A penalty is severe, but they’re often reduced or fully abated when handled correctly—especially when the failure was non-willful or based on reasonable cause. Here’s a clear, practical roadmap.
Table of Contents
Understand the Penalty You’re Facing
The default penalty for Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) is:
- The greater of $10,000 or 5% of the trust’s gross assets treated as owned by the U.S. person
- Additional penalties can apply for continued non-filing after IRS notice
⚠️ The IRS usually assesses this automatically, even when no tax is owed.
Identify Why the Penalty Was Assessed
This matters because it determines your best resolution strategy.
Common reasons:
- The foreign trustee didn’t file (very common)
- The trust didn’t realize it was classified as a foreign trust
- Confusion about pension / retirement / superannuation plans
- Reliance on incorrect professional advice
- IRS misclassification (e.g., tax-favored foreign retirement trust)
File the Missing or Corrected Form 3520-A (Immediately)
Before asking for penalty relief, you must be technically compliant.
What to do:
- File the delinquent Form 3520-A
- Include:
- Correct trust classification
- Owner statement
- Foreign Grantor Trust Beneficiary Statement (if applicable)
- Check the “Late filing – reasonable cause” box if applicable
- Mail to the Ogden, UT IRS address (not e-filed)
📌 Even if the penalty has already been assessed, filing is still required.
The Form 3520-A penalty is based on trust value, not tax
Form 3520-A penalties are not a flat amount.
- 5% of the gross value of trust assets
- Measured at the end of the trust year
- Applies even if no income, no distributions, and no U.S. tax due
A $2 million foreign trust can trigger a $100,000 penalty for one year of non-filing.
The U.S. owner, not the trustee, bears the Form 3520-A penalty
Although Form 3520-A is technically filed by the foreign trustee:
- The U.S. owner is legally liable for penalties
- The IRS does not care that the trustee is overseas
- “My trustee wouldn’t file” is not a defense
This catches expats off guard more than almost any other rule.
Filing Form 3520 does not fix a missing Form 3520-A penalty
Form 3520 and Form 3520-A are not substitutes.
- Filing Form 3520 alone does not stop penalties
- The IRS treats the trust as unreported until 3520-A is filed
- Many taxpayers think they complied when they didn’t
This is one of the most common (and costly) misunderstandings.
Penalties can apply even when the IRS already knows about the trust
Disclosure elsewhere does not protect you.
No protection from:
- FBAR filing
- FATCA (Form 8938)
- Foreign tax returns
- Prior-year Forms 3520
Each year stands alone for 3520-A purposes.
“Dormant” or frozen trusts are not exempt
No activity does not mean no filing.
- No contributions
- No distributions
- No income
👉 Still penalizable if the trust legally exists.
The IRS often misclassifies arrangements as trusts
The IRS frequently treats foreign plans as trusts even when:
- Local law says they are contracts or pensions
- The taxpayer has limited control
- The structure is employer-managed
These misclassifications still lead to penalties—but they are strong abatement points.
The statute of limitations may never start
If Form 3520-A is not filed:
Old years are often targeted in international compliance campaigns
The statute of limitations on trust reporting does not begin
The IRS can assess penalties many years later
Request Penalty Abatement (Most Successful Path)
A. Reasonable Cause Statement (Key Step)
This is where most Form 3520-A penalty is eliminated.
Your statement should:
- Be clear, factual, and non-defensive
- Explain:
- Why the trust is foreign
- Why you believed filing was not required
- Steps taken to correct the issue
- Emphasize:
- Non-willfulness
- No tax avoidance
- Prompt corrective action
Strong reasonable cause arguments include:
- Foreign trustee unaware of U.S. filing rules
- Tax-favored retirement trust misunderstanding
- First-time filer with no prior penalties
- Reliance on a qualified tax professional
- IRS guidance ambiguity (very common with pensions)
📈 Well-written reasonable cause letters have a high success rate for 3520-A penalties.
B. Use Form 843 (If Penalty Already Assessed)
If the IRS has already billed, you:
- File Form 843 (Claim for Refund and Request for Abatement)
- Attach:
- Reasonable cause statement
- Proof of filing Form 3520-A
- IRS penalty notice (CP15 or similar)
5. Consider Streamlined Procedures (If Multiple Years Are Involved)
If you missed multiple years and are also out of compliance elsewhere:
Streamlined Filing Compliance Procedures (SFCP)
- Especially helpful if:
- You’re an expat
- The trust is a foreign pension
- Non-willful conduct
- Can eliminate all information return penalties, including 3520-A
⚠️ Not always the best route for U.S. residents—this requires careful analysis.
6. If the Trust Is a Foreign Retirement Plan
Many 3520-A penalties arise from misclassified pensions.
Possible relief paths:
- Argue the trust qualifies as a:
- Tax-Favored Foreign Retirement Trust
- Employer-maintained plan
- Cite:
- Rev. Proc. 2020-17 (if applicable)
- IRS inconsistency in pension treatment
- In some cases, request penalty removal due to IRS error
7. Escalation Options (If IRS Refuses)
If abatement is denied:
- Request Appeals review
- Provide expanded legal support
- As a last resort:
- Pay and sue for refund (rare, but effective in some cases – discuss with a tax professional)