Cook Islands Trust IRS Reporting: 2026 Compliance Guide

A Cook Islands Trust established by a U.S. citizen or resident is classified as a “Foreign Grantor Trust” under Internal Revenue Code (IRC) § 679. This tax classification ensures that the trust remains “tax neutral” while imposing strict information reporting requirements on the Settlor.

From a federal tax perspective, the trust is disregarded as a separate taxable entity. All income, capital gains, and dividends generated by trust assets “flow through” to the Grantor and must be reported on their personal Form 1040, exactly as if the assets were held in their own name.

Required IRS Filings Checklist

Compliance involves two primary information returns: Form 3520 (filed by the owner) and Form 3520-A (filed by the trust). Failure to file these forms results in penalties based on the gross value of the assets, rather than the tax due.

1. Form 3520 (Owner’s Obligation)

Form 3520 (Annual Return to Report Transactions With Foreign Trusts) is filed by the U.S. Grantor. It is required in any tax year where a “reportable event” occurs, which includes:

• Creation: The initial establishment of the trust structure.
• Funding: The transfer of money or property into the trust (Part II).
• Distributions: The receipt of any direct or indirect distribution from the trust (Part III).

2. Form 3520-A (Trustee’s Obligation)

Form 3520-A (Annual Information Return of Foreign Trust) provides the IRS with the trust’s financial statements. While the foreign trustee is technically responsible for filing, U.S. law allows the Grantor to file a “Substitute Form 3520-A” to ensure compliance.

Penalty Relief Updates (2025/2026)

Prior to 2025, the IRS utilized “Systemic Assessment” to automatically penalize late filings. In late 2024, IRS Commissioner Danny Werfel issued a directive ending the practice of automatic penalties for Forms 3520 and 3520-A.

Currently, the IRS generally reviews a “Reasonable Cause” statement prior to assessing penalties. If a taxpayer can demonstrate that non-compliance was due to reasonable cause (such as reliance on a qualified tax professional or delays in receiving foreign bank data) and not willful neglect, penalties may be abated.

Crypto-Asset Reporting Framework (CARF)

The Cook Islands is a signatory to the OECD’s Crypto-Asset Reporting Framework (CARF), which mandates the automatic exchange of digital asset transaction data.

• Form 1099-DA: Beginning in the 2026 tax year, transactions involving digital assets may generate Form 1099-DA.
• Reconciliation: Taxpayers must ensure that transactions reported on Form 3520 align with data provided to the IRS via CARF exchanges. Discrepancies between the offshore trust’s blockchain activity and the Grantor’s personal return will likely trigger an automated audit.