IRS Reporting Requirements for Offshore Trusts
U.S. persons who create or benefit from an offshore trust must file several annual information returns with the IRS and the U.S. Treasury Department. These filings are separate from the settlor’s regular income tax return and carry severe penalties for noncompliance.
The government requires full transparency about offshore holdings, not because the arrangements are suspect, but because foreign accounts fall outside the domestic information-reporting system that banks and brokerages provide automatically. Proper reporting satisfies every federal requirement, and the trust is legal under both federal and state law.
The core filing requirements for a U.S. person who establishes an offshore asset protection trust and is treated as the owner under the grantor trust rules are Form 3520, Form 3520-A, FinCEN Form 114 (FBAR), and potentially Form 8938. Each form serves a different purpose, is filed with a different agency, and carries its own penalty structure.
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Form 3520
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 creates a foreign trust, transfers property to a foreign trust, or receives a distribution from a foreign trust. For asset protection trust settlors, Form 3520 is required in the year the trust is created and in every subsequent year in which the settlor is treated as the owner.
The form reports the trust’s existence, the settlor’s relationship to the trust, and any transactions during the year—including transfers to the trust and distributions from it. It also reports the trust’s assets and the U.S. person’s ownership percentage.
Form 3520 is due on the same date as the taxpayer’s income tax return, including extensions. For calendar-year individuals, the standard due date is April 15, with an automatic extension to October 15 if the taxpayer files Form 4868. The Form 3520 extension follows the income tax extension but does not extend beyond October 15 even if the taxpayer receives a discretionary extension for the underlying return.
The penalty for failing to file Form 3520 or filing an incomplete return is the greater of $10,000 or 5% of the gross value of the trust assets treated as owned by the U.S. person. Additional penalties of $10,000 per 30-day period may apply after the IRS issues a notice of noncompliance, up to a maximum additional penalty of $50,000.
Form 3520-A
Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, is the information return filed by or on behalf of the foreign trust itself. If the foreign trustee does not file Form 3520-A, the U.S. owner faces penalties for the trust’s noncompliance.
The form reports the trust’s balance sheet, income statement, and a schedule of U.S. beneficiaries and their respective interests. It requires the trust to provide a Foreign Grantor Trust Owner Statement and a Foreign Grantor Trust Beneficiary Statement to each U.S. person treated as an owner or who received a distribution.
Form 3520-A is due March 15 for calendar-year trusts, with a six-month extension available by filing Form 7004. The March 15 due date is earlier than the Form 3520 due date, which creates a coordination requirement between the U.S. owner and the offshore trustee. The trustee’s accountant prepares Form 3520-A and transmits it to the U.S. owner’s CPA, along with the Foreign Grantor Trust Owner Statement required for the settlor’s Form 3520 and 3520-A filings.
The penalty for failing to file Form 3520-A is the greater of $10,000 or 5% of the gross value of the trust assets treated as owned by the U.S. person. This penalty is assessed separately from the Form 3520 penalty, meaning a U.S. person who misses both forms faces a minimum combined penalty of $20,000 per year.
The trust should be assigned its own Employer Identification Number (EIN) for purposes of filing Form 3520-A. The EIN does not subject the trust to U.S. taxation or change its foreign status—it is simply an identifier within the IRS filing system.
FinCEN Form 114 (FBAR)
FinCEN Form 114, Report of Foreign Bank and Financial Accounts, must be filed by any U.S. person who has a financial interest in or signature authority over foreign financial accounts if the aggregate value exceeds $10,000 at any point during the calendar year. For offshore trust settlors, the FBAR is required whenever the trust or its underlying entities—such as an offshore LLC—hold bank or brokerage accounts outside the United States.
The FBAR is not filed with the IRS. It is filed electronically with the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Treasury Department. The filing system is entirely separate from the IRS e-file system.
The FBAR is due April 15 with an automatic extension to October 15. No additional extension is available.
FBAR penalties are the most severe of all offshore trust filing requirements. A non-willful failure to file carries a penalty of up to $10,000 per account per year. A willful failure carries a penalty of the greater of $100,000 or 50% of the account balance at the time of the violation, per account per year. Criminal penalties, including imprisonment, apply to willful FBAR violations.
Form 8938
Form 8938, Statement of Specified Foreign Financial Assets, must be filed by U.S. persons whose specified foreign financial assets exceed certain thresholds. For unmarried taxpayers living in the United States, the filing threshold is $50,000 in aggregate value on the last day of the tax year or $75,000 at any time during the year. Thresholds are higher for married couples filing jointly and for U.S. persons living abroad.
Form 8938 is filed as an attachment to Form 1040. It reports the same types of foreign financial assets reported on the FBAR but serves a different statutory purpose and is administered by the IRS rather than FinCEN. Filing one form does not satisfy the obligation to file the other.
One exception applies: if the U.S. owner timely files Form 3520 and the trust timely files Form 3520-A, the U.S. owner does not need to separately report the trust’s assets on Form 8938. Foreign financial accounts held outside the trust structure must still be reported.
The penalty for failure to file Form 8938 is $10,000, with additional penalties of up to $50,000 for continued noncompliance after notice.
Filing Summary
| Form | Filed With | Due Date | Extension | Minimum Penalty |
|---|---|---|---|---|
| Form 3520 | IRS | April 15 | October 15 (with income tax extension) | Greater of $10,000 or 5% of trust assets |
| Form 3520-A | IRS | March 15 | September 15 (Form 7004) | Greater of $10,000 or 5% of trust assets |
| FBAR (FinCEN 114) | FinCEN (Treasury) | April 15 | October 15 (automatic) | $10,000/account (non-willful); $100,000 or 50% of balance (willful) |
| Form 8938 | IRS (with Form 1040) | April 15 | October 15 (with income tax extension) | $10,000 |
Schedule B and Income Tax Return
The settlor of a foreign grantor trust must also check the box on Schedule B, Part III of Form 1040 indicating an interest in or signature authority over a foreign financial account. The trust’s income, gains, losses, and deductions are reported on the settlor’s personal return as if the assets were held directly. The trust does not file a separate U.S. income tax return.
The offshore trust is tax-neutral. There is no deferral of income, no preferential tax rate, and no reduction in tax liability. The reporting burden is real, but the structure provides no tax benefit whatsoever.
Additional Forms
Depending on the trust’s structure and assets, additional forms may be required. If the trust owns a foreign corporation, Form 5471 may apply. If the trust owns a foreign disregarded entity such as a single-member LLC, Form 8858 is required. If the trust makes an entity classification election, Form 8832 is used.
Each additional form applies only when the trust holds a specific type of asset or entity. A CPA with foreign trust experience will identify which forms apply based on the trust’s configuration.
Practical Compliance
General tax practitioners rarely handle Forms 3520, 3520-A, or FBAR filings, and errors on these forms trigger penalties even when the underlying information is straightforward. The work requires a CPA with specific foreign trust experience.
Annual compliance cost for these filings runs $2,000 to $4,000, separate from regular income tax preparation. That cost is part of the total annual expense of maintaining an offshore trust. The offshore trustee coordinates with the U.S. owner’s CPA to provide the financial data needed for Form 3520-A and the owner’s statements, and this coordination is included in the trustee’s annual fee.
Compliance from the outset is essential. A properly reported offshore trust is far more defensible in litigation than one that surfaces for the first time during discovery. The filing history itself becomes evidence that the trust was established for legitimate asset protection purposes, not to conceal assets.
