Project 00960

RECOMMENDATION TEXT:

Have Forms 3520 and 3520-A and related instructions in multiple languages.
Justification: Many taxpayers have English as their second language. Having the form in a language more familiar to them will increase compliance.

RECOMMENDATION TEXT:

Have the Tips, Cautions and Notes in a different color
Justification: Changing the color of the Tips, Cautions and Notes will have them stand out from the rest of the instructions.

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Form 3520 General recommendation
Create a Modernized e-File schema to allow the form to be eligible for efiling, added to the free file fillable forms and auto populated from previous sections.
Justification: We strongly recommend that the IRS develop a Modernized e-File schema so that Form 3520 (and 3520-A) can be electronically filed.
Allowing e-filing will reduce the cost and workload for the IRS, as the labor of receiving mailed paper filings, opening them, and keying them into the computer system would be alleviated, among other costs.
Permitting e-filing will also significantly reduce the burden for taxpayers, who currently must print, collate, and mail the form along with required attachments, which can be a particular challenge for some filers living in foreign or remote areas, as international mail can be expensive and postal services outside the United States can be unreliable.
With the additional IRS funding, accelerate the timeframe for having Form 3520 and Form 3520-A having Modernized e-File schema created for them to allow for digital submission and/or scanning, data extraction. The recommendation reduces the amount of paper the Service receives and reduces the amount of mail to be opened and processed. It also reduces the taxpayer’s cost of compliance.
Additionally, transitioning to e-filing would address the issue of lost returns in international mail, providing a more reliable and secure means of submitting tax forms. By adopting a digital platform, taxpayers would have greater confidence that their filings reach the IRS without the risk of being lost or delayed during the mailing process..

RECOMMENDATION TEXT:

General recommendation
Current text: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
Split the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts into two separate Forms. (One form dealing with foreign gifts and one form dealing with trust)
Justification: The receipt of certain foreign gifts isn’t related to Foreign Trusts. Leaving it as one form means the IRS will potentially receive 5 pages with no information when the taxpayer only needed to complete Page 6. This will reduce the amount of paper the IRS will receive.

RECOMMENDATION TEXT:

Form 3520-A
General recommendation
Change Form 3520-A due date to 4/15 and the extended due date to 9/30
Justification: Form 3520-A is due 3/15. We recommend changing Form 3520-A due date to 4/15 and the extended due date to 9/30 which is consistent with the domestic trust tax return filing dates. The change would be consistent with the domestic trust filing due dates. This would cut down on the amount of people filing late.

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Form 3520-A
General recommendation
Add due date to the signature block of the form
Justification: This would cut down on the amount of people filing late.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 1, Col. 1
Under reminders, add the following:
Form 3520 is due on the 15th day of the 4th month following the end of the taxpayer’s tax year. Some taxpayers living and working outside the United States have until the 15thd day of the sixth month to file the form.
See more detailed information on Page 2 under When and Where to File.
Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s year. However, if you are filing a substitute Form 3520-A with your Form 3520, then the substitute Form 3520-A is due the same day as Form 3520.
Remember to check box 1k and include the form number of the tax return to be filed if an extension of time to file has been requested.
Check the “Substitute From 3520-A” box if you are a U.S. owner of a foreign trust filing a substitute Form 3520-A because the foreign trust didn’t file Form 3520-A.
Form 3520 is not eligible for e-filing. Be sure to mail the form and Form 3520-A, if applicable to the address under When and Where to File.
Justification: IRS has identified the additions as areas where taxpayers are not compliant in completing Form 3520.
Adding a reminder draws attention to the fact that owners left in the position of filing substitute Forms 3520-A can use the due date for their Form 3520 (instead of the regular due date for Form 3520-A, which is typically a month earlier) offers clarity and removes some of the confusion about the due dates for Form 3520-A.
Reminds taxpayers to paper file the form since it isn’t eligible for e-filing even though their individual tax return is filed electronically.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 1, Col. 1
Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for Part 1.
Reformat to indent and center text
Justification: Indentation and centering of text would help make clear to the taxpayer which part of Form 3520 needs to be completed under the circumstances stated in the paragraph above.

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Instructions for Form 3520, Page 1, Col. 1
Complete the identifying information on page 1 of the form and Part II. See the instructions for Part II.
Reformat to indent and center text
Justification: Indentation and centering of text would help make clear to the taxpayer which part of Form 3520 needs to be completed under the circumstances stated in the paragraph above.

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Instructions for Form 3520, Page 1, Col. 2
Complete the identifying information on page 1 of the form and Part III. In the case of a U.S. person that is an estate, check “Executor” on line B on page 1. See the instructions for Part III.
Reformat to indent and center text
Justification: Indentation and centering of text would help make clear to the taxpayer which part of Form 3520 needs to be completed under the circumstances stated in the paragraph above.

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Instructions for Form 3520, Page 1, Col. 2
Complete the identifying information on page 1 of the form and Part IV. See the instructions for Part IV.
Reformat to indent and center text
Justification: Indentation and centering of text would help make clear to the taxpayer which part of Form 3520 needs to be completed under the circumstances stated in the paragraph above.

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Instructions for Form 3520, Page 7, Col. 1, Paragraph 1
Uses social security numbers ……..
Uses Social Security numbers ….
Justification: Social Security is an established government program (and agency) and should be capitalized.

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Instructions for Form 3520, Page 1, Col. 2 4b.
More than the section 6039F threshold amount from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts. The threshold amount from Rev. Proc. 2020-45 is available at IRS.gov/newsroom/ irs-provides-tax-inflation-adjustments-for-tax-year-2021.
More than $16,815 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
Justification: The information is more readily available to the taxpayer. The form is updated annually, and the information is available in October of each year. However, it is worth noting that certain taxpayers may not have access to the internet.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 1, Col. 2 Exceptions to filing
• Transfers to foreign trusts described in section 402(b), 404(a)(4), or 404A.
Update to:
• Transfers to funded nonqualified deferred compensation arrangements described in section 402(b),
• Stock bonus, pension, or profit-sharing trusts that would qualify for exemption under section 501(a) except for the fact that it is a trust created or organized outside the US described in section 404(a)(4)
• qualified foreign plan” means any written plan of an employer for deferring the receipt of compensation but only if—
(1)
such plan is for the exclusive benefit of the employer’s employees or their beneficiaries,
(2)
90 percent or more of the amounts taken into account for the taxable year under the plan are attributable to services—
(A) performed by nonresident aliens, and
(B) the compensation for which is not subject to tax under this chapter, and
(3)
the employer elects (at such time and in such manner as the Secretary shall by regulations prescribe) to have this section apply to such plan.
See flowchart A to determine if the foreign trust must be reported.
Justification: The information is more readily available to the taxpayer.
The foreign trust rules are complex and adding a flowchart may make it easier for the taxpayer to determine whether the foreign trust needs to be reported on Form 3520.

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Instructions for Form 3520, Page 2, col 1
In general, a U.S. person’s Form 3520 is due on the 15th day of the 4th month following the end of such person’s tax year for income tax purposes, which, for individuals, is April 15.
Update to:
In general, Form 3520 is due on the same day as the filer’s income tax return. For individuals, that date is April 15. Business entities, estates and some trusts may have different tax years, and the due dates for those filers will be the 15th day of the 4th month following the end of their tax year.
Justification: This improves clarity by telling individuals when the form is due, but also offering due date information to filers that are not 1040 filers.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2, Col. 1 Exceptions to filing
Certain eligible individuals’ transfers to, ownership of, and distributions from certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts, as described in section 5 of Rev. Proc. 2020-17. For more information about whether you are an eligible individual, and whether your foreign trust qualifies for an exemption from foreign trust information reporting, see Rev. Proc. 2020-17, 2020-12 I.R.B. 539, available at IRS.gov/IRB/ 2020-12_IRB#REV-PROC-2020-17.
Update to:
Certain eligible individuals’ transfers to, ownership of, and distributions from certain tax-favored foreign retirement trusts that meet the following requirements established by the laws of the trust’s jurisdiction
• (1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction. For purposes of this revenue procedure, a trust is tax-favored if it meets any one or more of the following conditions: (i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and (ii) taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
• (2) Annual information reporting with respect to the trust (or of its participants or beneficiaries) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
• (3) Only contributions with respect to income earned from the performance of personal services are permitted.
• (4) Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust or are subject to a lifetime limit of $1,000,000 or less to the trust. These contribution limits are determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available at https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange).
• (5) Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met. A trust that otherwise meets the requirements of section 5.03(5) of Rev Proc 2020-17, but that allows withdrawals, distributions, or payments for in-service loans or for reasons such as hardship, educational purposes, or the purchase of a primary residence, will be treated as meeting the requirements of section 5.03(5) of Rev Proc 2020-17.
• (6) In the case of an employer-maintained trust, (i) the trust is nondiscriminatory insofar as a wide range of employees, including rank and file employees, must be eligible to make or receive contributions or accrue benefits under the terms of the trust (alone or in combination with other comparable plans), (ii) the trust (alone or in combination with other comparable plans) actually provides significant benefits for a substantial majority of eligible employees, and (iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory..
See flowchart B.

In addition, certain eligible individuals’ transfers to, ownership of, and distributions from tax-favored foreign nonretirement savings trusts if the foreign trust is created, organized, or otherwise established under the laws of a foreign jurisdiction as a trust plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction.
• (1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction as defined in section 5.03(1) of this revenue procedure.
• (2) Annual information reporting with respect to the trust (or about the beneficiary or participant) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
• (3) Contributions to the trust are limited to $10,000 or less annually or $200,000 or less on a lifetime basis, determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available at https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange).
• (4) Withdrawals, distributions, or payments from the trust are conditioned upon the provision of medical, disability, or educational benefits, or apply penalties to withdrawals, distributions, or payments made before such conditions are met.
See flowchart C.
For more information about whether you are an eligible individual and penalties, see Rev. Proc. 2020-17, 2020-12 I.R.B. 539, available at IRS.gov/IRB/ 2020-12_IRB#REV-PROC-2020-17.
Justification: The information is more readily available to the taxpayer.
The foreign trust reporting requirements are complex and adding flowcharts may make it easier for the taxpayer to determine if the exceptions to filing are met.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 1 Col. 1
Reminder: When aggregate employer contributions to the employer-sponsored plan exceed the employee’s aggregate contributions, the plan falls under section 402(b) and does not need to be disclosed on IRS Forms 3520 and 3520-A.
Justification: Adding the tip/reminder, provides much needed guidance to taxpayers with foreign employer pension in determining whether the employer-sponsored plan needs to be reported on Form 3520 and 3520-A.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2 Col 2 When and where to file
If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).
Update to:
CAUTION! If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8). The filing of Form 3520 with the tax return will start the time for assessment.
Justification: Adding the Caution/reminder draws attention to the fact that the statute of limitations will not begin to run until a proper filing is submitted.
Informing taxpayers of when the assessment period begins is important.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 1 Col 1
Reminder: If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8). The filing of Form 3520 with the tax return will start the time for assessment.
Justification: Adding the reminder draws attention to the fact that the statute of limitations will not begin to run until a proper filing is submitted.
Informing taxpayers of when the assessment period begins is important.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2, Col. 2 When and where to file
Send Form 3520 to the following address. Internal Revenue Service Center P.O. Box 409101 Ogden, UT 84409
Consider eliminating since the Form is attached to the tax return.
Justification: Taxpayers may inadvertently not file the form separately. Many returns are filed electronically which makes it available to the Service for their review. The recommendation reduces the amount of paper the Service receives and reduces the amount of mail to be opened and processed.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2, Col. 2 When and where to file
If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).
Update to:
If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8). The filing of Form 3520 with the tax return will start the time for assessment.
Justification: If the provision to mail the Form separately remains, informing taxpayers of when the assessment period begins is important.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2, Col. 2 Who must sign
If the return is filed by: • An individual or a fiduciary, it must be signed and dated by that individual or fiduciary; •
Update to:
If the return is paper filed by: • An individual or a fiduciary, it must be signed and dated by that individual or fiduciary; •
Justification: If the recommendation to have Form 3520 filed electronically is accepted and if the separate filing of the form is eliminated, this section can be deleted.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 2, Col. 2 Who must sign
Add
TIP: Electronic signatures are allowed.
Justification: Recommendation will highlight for taxpayers that the form can be electronically signed. In addition, we recommend that the form be eligible for electronic signatures permanently.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 3, Col 1
• 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679), if the foreign trust (a) fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year) in order to avoid being subject to the penalty for the foreign trust’s failure to timely file Form 3520-A. For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as April 15 for U.S. owners who are individuals), is considered to be timely filed. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.
Update to:
• 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679), if the foreign trust (a) fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information.
[New Paragraph] If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 in order to avoid being subject to the penalty for the foreign trust’s failure to timely file Form 3520-A.
[New Paragraph] For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520, including extensions, is considered to be timely filed. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.
Justification: Breaking the long dense paragraph into a series of shorter paragraphs improves readability.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 4, Col. 1
Tip: With respect to non-US pension or similar plans, in order to determine the appropriate US tax classification of the plan, you should determine who made contributions to the plan. In general, if all contributions to the plan are considered employee contributions made by you, then the plan would be appropriately classified as a grantor trust. However, if your employer contributions to the plan equal or exceed your contributions, the plan may not be treated as a grantor trust. Please consult IRC Section 1.402(b)-1(b)(6)
Please consult IRC Section 1.402(b)-1(b)(6). In general, a beneficiary of a foreign pension plan may not be considered to be the owner under subpart E, part I, subchapter J, chapter I of the Code of any portion of such trust which is attributable to contributions to such trust made by the employer after August 1, 1969, or to incidental contributions made by the employee after such date. However, where contributions made by the employee are not incidental when compared to contributions made by the employer, such beneficiary shall be considered to be the owner of the portion of the trust attributable to contributions made by the employee, if the applicable requirements of such subpart E are satisfied.
Justification: The recommendation will provide guidance to a taxpayer with a foreign retirement plan. The rules are very complicated, and taxpayers may not be aware of their filing requirement.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 7, Col. 1 Line 2b
Enter the EIN of the foreign trust.
Update to:
Enter the EIN of the foreign trust, if any. A foreign grantor trust must have an EIN.
Justification: Recommendation is to have the instructions consistent with Form 3520 in 2b and Form 3520 instructions for Part II first paragraph Page 8 Col 2.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 7, Col. 2 Line 5a
Name of trust creator
Update to:
Line 5a If you are the trust creator, enter “Same as line 1a”.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 7, Col 2 through Page 8, Col 1
Line 12. If you answered “Yes” to the question on line 11b with respect to any obligation, you must generally answer “Yes” to the question on line 12. By so doing, you agree to extend the period of assessment of any income or transfer tax attributable to the transfer and any consequential income tax changes for each year that the obligation is outstanding to a date 3 years after the maturity date of the obligation. You have the right to refuse to extend the period of assessment. Pub. 1035, Extending the Tax Assessment Period, provides a more detailed explanation of your rights and the consequences of the choices you may make. When executed and filed, this form will be deemed to be agreed upon and executed by the IRS for purposes of Regulations section 301.6501(c)-1(d).
Update to:
Line 12. If you answered “Yes” to the question on line 11b with respect to any obligation, you must generally answer “Yes” to the question on line 12. By so doing, you agree to extend the period of assessment of any income or transfer tax attributable to the transfer and any consequential income tax changes for each year that the obligation is outstanding to a date 3 years after the maturity date of the obligation. When executed and filed, this form will be deemed to be agreed upon and executed by the IRS for purposes of Regulations section 301.6501(c)-1(d).
[New Paragraph] You have the right to refuse to extend the period of assessment. Pub. 1035, Extending the Tax Assessment Period, provides a more detailed explanation of your rights and the consequences of the choices you may make.
Justification: Creating a new paragraph outlining the taxpayer’s right to refuse to extend the period of assessment helps draw their attention to this important right.

Moving the passage about deemed execution of the form to follow the discussion of agreeing to extend the period of assessment aids comprehension and makes the language flow a bit clearer.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 8, Col. 1 Line 13
• For transfers reported on statements, you must enter “Statement” on one of the lines in column (b) and enter the total amount of transfers reported on the statement on line 13, columns (c), (d), (e), (f), (h), and (i).
Update to:
• For transfers reported on statements attached to the form, you must enter “Statement” on one of the lines in column (b) and enter the total amount of transfers reported on the statement on line 13, columns (c), (d), (e), (f), (h), and (i).
Justification: The recommendation makes it clear the statement referred to as a statement attached to the form.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 8, Col. 1 Lines 15-18
Lines 15 through 18. If you checked “No” on line 3, acknowledging that the foreign trust did not appoint a U.S. agent who can provide the IRS with all relevant trust information, complete lines 15 through 18.
Update to:
Lines 15 through 18. If you checked “No” on line 3 and you are required to complete Part I, acknowledging that the foreign trust did not appoint a U.S. agent who can provide the IRS with all relevant trust information, complete lines 15 through 18.
Justification: Recommendation is to be consistent with Form 3520 line 3.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 8, Col. 2 Line 18
Attach a copy of the following documents
Update to:
Attach a copy of the following documents. If the documents are not available or do not exist, please attach a statement.
Justification: Recommendation is to provide guidance when the document doesn’t exist.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 8, Col 2
• A copy of the trust’s financial statements, including a balance sheet and an income statement similar to those shown on Form 3520-A. These financial statements must reasonably reflect the trust’s accumulated income under U.S. income tax principles. For example, the statements must not treat capital gains as additions to trust corpus.
Update to:
• A copy of the trust’s financial statements, including a balance sheet and an income statement similar to those shown on Form 3520-A. These financial statements must reasonably reflect the trust’s accumulated income under U.S. income tax principles, but the statements must not treat capital gains as additions to trust corpus.
Justification:
The existing language mischaracterizes U.S. tax principles since the default U.S. tax treatment is for capital gains to be charged to trust corpus. This statement clarifies that capital gains must be treated as income.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 9, Col 1
Line 22. If “Yes,” the copy of the Foreign Grantor Trust Owner Statement (pages 3 and 4 of Form 3520-A) should show the amount of the foreign trust’s income that is attributable to you for U.S. income tax purposes. See section IV. of Notice 97-34.
If “No,” to the best of your ability, complete and attach a substitute Form 3520-A for the foreign trust to your Form 3520 by the due date of your Form 3520 (and not the due date for the Form 3520-A). Otherwise, you may be liable for a penalty equal to the greater of $10,000 or 5% of the gross value of the portion of trust assets that you are treated as owning. There are additional penalties for continuing failure to file after notice by the IRS. See section 6677(a) through (c). Also see Penalties, earlier.
Update to:
Line 22. If “the foreign trust filed Form 3520-A for the current tax year, check “Yes” and attach a copy of Pages 3 and 4 of the Form 3520-A.
If the foreign trust has not filed Form 3520-A for the current tax year, check “No” and attach a Substitute Form 3520-A that you have completed to the best of your ability.
CAUTION: You may be liable for a penalty equal to the greater of $10,000 or 5% of the gross value of the portion of trust assets that you are treated as owning if you do not submit the Substitute Form 3520-A completed to the best of your ability. There are additional penalties for continuing failure to file after notice by the IRS. See section 6677(a) through (c). Also see Penalties, earlier.
Justification:
The suggested language offers clearer instructions for completing the form and is easier to read.

Adding the CAUTION statement emphasizes the penalties for non-compliance.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 9, Col 2
Line 26. See Line 12, earlier, except that “line 25, column (e)” should replace “line 11b,” and “line 26” should replace “line 12.”
Update to:
Line 26. If you answered “Yes” on Line 25, column (e) you must generally answer “yes” to the question on Line 26. By doing so, you agree to extend the period of assessment of any income or transfer tax attributable to the transfer and any consequential income tax changes for each year that the obligation is outstanding to a date 3 years after the maturity date of the obligation. When executed and filed, this form will be deemed to be agreed upon and executed by the IRS for purposes of Regulations section 301.6501(c)-1(d).
[New Paragraph] You have a right to refuse to extend the period of assessment. Pub. 1035, Extending the Tax Assessment Period, provides a more detailed explanation of your rights and the consequences of the choices you may make. When executed and filed, this form will be deemed to be agreed upon and executed by the IRS for purposes of Regulations section 301.6501(c)-1(d).
Justification:
The existing language makes the reader flip back and forth between pages to reconstitute the instructions for Line 26. It’s much clearer for the reader to simply give them direct instruction.
Including the information about the consequences of answering “Yes” is important, since the taxpayer’s responses potentially extend the period of assessment. This information needs to be presented for Line 26, as does the notification that the taxpayer has a right not to extend the period of assessment. Taxpayers have a right to be informed, and making this information clear to them allows them to carefully weigh their choices.

Moving the passage about deemed execution of the form to follow the discussion of agreeing to extend the period of assessment aids comprehension and makes the language flow a bit clearer.

RECOMMENDATION TEXT:

Form 3520 Instructions, Page 10, Col 1
2. An explanation of the facts necessary to establish that the foreign trust should be treated for U.S. tax purposes as owned by another person. (The explanation should identify the Code section that treats the trust as owned by another person.)
Update to:
2. An explanation of the facts necessary to establish that the foreign trust should be treated for U.S. tax purposes as owned by another person. The explanation should identify the Code section that treats the trust as owned by another person.
Justification:
Removing the parenthesis improves clarity, since a reference to the code section is required, rather than an aside.

RECOMMENDATION TEXT:

Form 3520 Instructions, Page 10, Col 1
5. A statement that the trust will permit either the IRS or the U.S. beneficiary to inspect and copy the trust’s permanent books of account, records, and such other documents that are necessary to establish that the trust should be treated for U.S. tax purposes as owned by another person. This statement is not necessary if the trust has appointed a U.S. agent.
Update to:
5. A statement that the trust will permit either the IRS or the U.S. beneficiary to inspect and copy the trust’s permanent books of account, records, and such other documents that are necessary to establish that the trust should be treated for U.S. tax purposes as owned by another person.
TIP: This statement is not necessary if the trust has appointed a U.S. agent.
Justification:
The reporting requirements for foreign trusts may be significantly reduced by appointment of a U.S. agent. Adding a TIP marker highlights one of the benefits available to trusts that appoint a U.S. agent.

RECOMMENDATION TEXT:

Form 3520 Instructions, Page 11 Col 2
Part IV—U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons
Note. If you fail to timely report foreign gifts that should be reported under section 6039F, the IRS may determine the income tax consequences of the receipt of such gift and penalties may be imposed. See Penalties, earlier.
A gift to a U.S. person does not include any amount paid for qualified tuition or medical payments made on behalf of the U.S. person.
If a foreign trust makes a distribution to a U.S. person, the U.S. person must report the amount as a distribution in Part III, rather than as a gift in Part IV.
Update to:
Part IV—U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons
Generally, U.S. persons who receive gifts or bequests from foreign persons must complete Part IV. However, if a foreign trust makes a distribution to a U.S. person, the U.S. person must report the amount as a distribution in Part III, rather than as a gift in Part IV.
A gift to a U.S. person does not include any amount paid for qualified tuition or medical payments made on behalf of the U.S. person.
CAUTION: If you fail to timely report foreign gifts that should be reported under section 6039F, the IRS may determine the income tax consequences of the receipt of such gift and penalties may be imposed. See Penalties, earlier.
Justification:
The existing language starts by outlining penalties for non-compliance rather than instructing the reader about how to comply. That unnecessarily sets a negative tone.

The suggested language identifies who must complete Part IV and the reordered paragraphs offer basic information about reportable gifts before addressing the penalties for non-compliace as a Caution.

RECOMMENDATION TEXT:

Instructions for Form 3520, Page 12, Col. 1 Line 55
Answer “Yes” if you received aggregate amounts in excess of the section 6039F threshold amount during the current tax year that you treated as gifts from foreign corporations or foreign partnerships (or any foreign persons that you know (or have reason to know) are related to such foreign corporations or foreign partnerships).
Update to:
Answer “Yes” if you received aggregate amounts in excess of the $16,815 (section 6039F threshold amount) during the current tax year that you treated as gifts from foreign corporations or foreign partnerships (or any foreign persons that you know (or have reason to know) are related to such foreign corporations or foreign partnerships).
Justification:
Adds clarity to the answer

RECOMMENDATION TEXT:

Form 3520 Part I Note
Note: Complete lines 15 through 18 only if you answered “No” to line 3, acknowledging that the foreign trust did not appoint a U.S. agent to provide the IRS with all relevant trust information
Update to:
Complete lines 15 through 18 only if you answered “No” to line 3, acknowledging that the foreign trust did not appoint a U.S. agent to provide the IRS with all relevant trust information and you are required to complete Part I, complete lines 15 through 18.
Justification:
Recommendation is to be consistent with Line 3.

RECOMMENDATION TEXT:

3520-A Instructions Page 1 column 1 Reminders
Add:
All information must be in English. Show all amounts in US dollars
Justification:
Added language will reinforce the note on page 1 of Form 3520-A. Taxpayers may miss the note at the top of page 1 of the form.

RECOMMENDATION TEXT:

Instructions for Form 3520-A, Page 1, Col. 1
Under reminders to Form 3520-A, add the following:
Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s year. See more detailed information under When and Where to File. However, if you are filing a substitute Form 3520-A with your Form 3520, then the substitute Form 3520-A is due the same day as Form 3520.
Remember to check box 1k and include the form number of the tax return to be filed if an extension of time to file has been requested.
Form 3520-A is not eligible for e-Filing. Be sure to mail the form to the address under When and Where to File.
Justification:
IRS has identified the additions as areas where taxpayers are not compliant in completing Form 3520

RECOMMENDATION TEXT:

IRS website
Add our recommendations to the IRS website under The Taxation of Foreign Pension and Annuity Distributions:
– relating to transfer to foreign trusts described in Sections 402(b), 404(a)(4) or 404A,
-When a trust is treated as a grantor trust
Justification:
US citizens living abroad may be reviewing the IRS website for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions.

RECOMMENDATION TEXT:

IRS website
Add our recommendations to the IRS website under Publication 54 Tax Guide for U.S. citizens and Resident Aliens Abroad.
– relating to transfer to foreign trusts described in Sections 402(b), 404(a)(4) or 404A,
-When a trust is treated as a grantor trust
Also add the language to the printed version of Publication 54.
Justification:
US citizens living abroad may be reviewing Publication 54 for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions.

RECOMMENDATION TEXT:

IRS website
Add the penalties for not filing Forms 3520 and 3520-A to the IRS website under Publication 54 Tax Guide for U.S. citizens and Resident Aliens Abroad. Also add the language to the printed version of Publication 54.
Justification:
US citizens living abroad may be reviewing Publication 54 for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust and make them aware of the penalty for noncompliance

RECOMMENDATION TEXT:

IRS website
Add the penalties for not filing Forms 3520 and 3520-A to the IRS website under The Taxation of Foreign Pension and Annuity Distributions.
Justification:
US citizens living abroad may be reviewing the IRS website for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust and make them aware of the penalty for noncompliance

RECOMMENDATION TEXT:

IRS website
Add the statute of limitation suspension when Forms 3520 and 3520-A are not filed or filed but are incomplete to the IRS website under The Taxation of Foreign Pension and Annuity Distributions.
Justification:
US citizens living abroad may be reviewing the IRS website for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust and make them aware of the suspension of the statute of limitations.

RECOMMENDATION TEXT:

IRS website
Add the statute of limitation suspension when Forms 3520 and 3520-A are not filed or filed but are incomplete to the IRS website Publication 54 Tax Guide for U.S. citizens and Resident Aliens Abroad. Also add the language to the printed version of Publication 54.
Justification:
US citizens living abroad may be reviewing Publication 54 for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust and make them aware of the suspension of the statute of limitations.

RECOMMENDATION TEXT:

IRS website
Add the filing requirements for filing Forms 3520 and 3520-A to the IRS website under Publication 54 Tax Guide for U.S. citizens and Resident Aliens Abroad. Also add the language to the printed version of Publication 54.
Justification:
US citizens living abroad may be reviewing Publication 54 for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust.

RECOMMENDATION TEXT:

IRS website
Add the filing requirements for filing Forms 3520 and 3520-A to the IRS website under The Taxation of Foreign Pension and Annuity Distributions.
Justification:
US citizens living abroad may be reviewing the IRS website for information related to foreign pension and annuity distributions. Adding additional guidance to the website will make it easier for the taxpayer to comply with foreign pension and annuity distributions. The recommendation will highlight the requirement to file additional forms if the taxpayer has a foreign account treated as a trust.