When Form 3520 Reporting & FBAR Filing are Both Required

FBAR and Form 3520 Intersection

FBAR and Form 3520 Intersection

 Form 3520 Reporting & FBAR Filing

When are Form 3520 Reporting & FBAR Filing both required: One of the most complicated aspects of international information reporting, is that oftentimes several different disclosure requirements will overlap with each other. One common scenario that this occurs in is with Form 3520 and the FBAR. Briefly, the Form 3520 is used to report a gift (or inheritance) or trust distribution to a US person, from a foreign person. The FBAR is used to report foreign bank and financial accounts each year to FinCEN on form FinCEN Form 114. These two international reporting forms are crucial because these are two of the most common forms for the IRS to issue offshore penalties  when the forms are not filed timely. Let’s walk through some examples of how the intersection of the FBAR and Form 3520 works:

Gift Example of FBAR & Form 3520

Michelle has a foreign account with a small amount of money (below $10,000).

Her foreign national parents abroad deposit $200,000 into an account for her to use as living expenses in the US.  Since, the account is above $10,000 (her annual aggregate total of all accounts) she will have to report the account on the FBAR. Likewise, since the value of the gift is over $100K and not used as direct payment of tuition or medical expenses — it is also reportable on Form 3520 as a foreign gift.

Inheritance Example of FBAR & Form 3520

Peter’s Grandma is a foreign person who resides in Taiwan.

When she passed way, she left Peter an investment account. Once probate was completed, the investment account was transferred into Peter’s name.  Following the foreign investment account being transferred into Peters name, Peter is now the proud owner of a foreign financial account. At the time the account was transferred to Peter it had $1.4 million — therefore, Peter has both a form 3520 and FBAR reporting requirement.

Trust Distribution Example of FBAR & Form 3520

Renee is the beneficiary of a foreign trust.

Each year, he receives a foreign trust distribution in the amount of $20,000. In addition, Renee’s family transfers that $20,000 each year into a foreign bank account which has been accruing deposits and interest income for the past 15 years.

For each year that Renee receives the foreign trust distribution he must file a form 3520 — because there is no minimum threshold for having to report to trust distributions. In addition, since the value Renee’s foreign bank accounts exceeds $10,000 — he should have been filing an FBAR as well for each year the annual aggregate total of his foreign accounts exceeded $10,000.

Form 3520 and FBAR Amnesty Options

The Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.

Some of the more common programs, include:

Can I Just Start Filing FBAR/Form 3520 This Year Instead?

No, unless the current year is the first-year you had an 3520/FBAR Reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as an Quiet Disclosure.  The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.

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