Forms 3520 and 3520-A for Cook Islands Trusts

Forms 3520 and 3520-A are the primary information returns the IRS requires from U.S. persons involved with foreign trusts. Form 3520 is filed by the U.S. grantor to report the creation of the trust, transfers of property to the trust, ownership of the trust under the grantor trust rules, and receipt of distributions. Form 3520-A is the trust’s own annual information return, reporting the trust’s income, expenses, assets, and liabilities. Both forms must be filed every year that a Cook Islands trust exists, regardless of whether the trust generates income, makes distributions, or changes in any way.

These are information returns, not tax returns. They do not calculate tax owed and they do not result in a payment to the IRS. Their purpose is disclosure. The IRS wants to know that the trust exists, what it holds, what income it earned, and what transactions occurred during the year. A Cook Islands trust that sits dormant with $500,000 in a foreign brokerage account, earns $15,000 in dividends, and makes no distributions still requires both forms to be filed.

The penalties for failing to file are severe and, until recently, were assessed automatically without any review of the taxpayer’s circumstances. In October 2024, the IRS announced it would stop automatically imposing penalties on late-filed Forms 3520 and 3520-A and would instead review reasonable cause statements before assessing penalties. This policy change is significant but does not eliminate the penalties themselves. Understanding what each form requires, when it is due, and how the two forms interact is essential for any U.S. person with a Cook Islands trust. A broader overview of all reporting obligations is available in the compliance requirements hub.

Form 3520: What It Covers

Form 3520, formally titled “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” has four parts. For Cook Islands trust grantors, Parts I and II are the most relevant.

Part I covers “reportable events” involving foreign trusts. A reportable event includes the creation of a foreign trust by a U.S. person, any transfer of money or property to a foreign trust by a U.S. person, and the death of a U.S. person who was treated as the owner of a foreign trust. The initial creation and funding of a Cook Islands trust is a reportable event. Any subsequent transfer of additional assets to the trust is also a reportable event. Each reportable event must be disclosed on Part I, including the date of the transfer, the fair market value of the property transferred, and the U.S. adjusted basis of the property.

Part II covers U.S. persons who are treated as owners of a foreign trust under the grantor trust rules in IRC sections 671 through 679. Because Cook Islands asset protection trusts are structured as grantor trusts, the U.S. grantor must complete Part II every year, reporting the fair market value of the trust assets treated as owned by the grantor at year-end. This part also requires the grantor to attach the Foreign Grantor Trust Owner Statement (pages 3 and 4 of Form 3520-A), which the trustee provides. If the trustee did not file Form 3520-A, the grantor must attach a substitute Form 3520-A prepared to the best of the grantor’s ability.

Part III covers distributions received from foreign trusts. For grantor trusts, distributions are treated as coming from the grantor’s own assets for tax purposes, so the tax treatment is straightforward. However, any distribution must still be reported on Part III, including the amount, the date, and whether the distribution was from trust income or corpus.

Part IV covers foreign gifts and bequests exceeding $100,000 from nonresident alien individuals or foreign estates, and gifts exceeding certain thresholds from foreign corporations or partnerships. This section is not relevant to most Cook Islands trust arrangements but appears on the same form.

Form 3520-A: What It Covers

Form 3520-A, formally titled “Annual Information Return of Foreign Trust With a U.S. Owner,” is technically the trust’s form, not the grantor’s. The Cook Islands trustee is the party responsible for filing it. In practice, the U.S. grantor’s CPA prepares it using financial information provided by the trustee, and the trustee signs it.

Form 3520-A requires a complete financial statement of the trust’s operations during the year, including interest income, dividends, capital gains and losses, partnership or fiduciary income, rents, royalties, and all other categories of income. It also requires a balance sheet showing the trust’s assets and liabilities at year-end and a reconciliation of the trust’s opening and closing net worth.

The form includes two critical attachments. The Foreign Grantor Trust Owner Statement (pages 3 and 4) provides the grantor with the information needed to report trust income on the grantor’s personal tax return. The Foreign Grantor Trust Beneficiary Statement (page 5) provides similar information to any U.S. beneficiary who received a distribution during the year. These statements must be furnished to the U.S. owner and beneficiaries by the due date of Form 3520-A (or by the extended due date, if an extension was filed).

If the Cook Islands trustee does not file Form 3520-A, the U.S. grantor must file a “substitute” Form 3520-A. The grantor completes the form to the best of their ability using whatever financial information is available, attaches it to the grantor’s Form 3520, and files both together. Filing a substitute Form 3520-A protects the grantor from penalties that would otherwise apply for the trust’s failure to file, provided the substitute is complete and timely. In most properly administered Cook Islands trust arrangements, the trustee cooperates in providing the information needed for the CPA to prepare Form 3520-A, and the trustee signs the form. The substitute filing mechanism is a backstop, not the normal process.

Deadlines and Extensions

The two forms have different deadlines, which is a frequent source of confusion.

Form 3520-A is due on the 15th day of the third month after the end of the trust’s tax year. For a calendar-year trust, this means March 15. The trust (or the U.S. owner filing on behalf of the trust) may request an automatic six-month extension by filing Form 7004, using the trust’s Employer Identification Number (EIN). The extension moves the deadline to September 15. An extension of time to file an income tax return does not extend the Form 3520-A deadline. The extension must be requested specifically for Form 3520-A using Form 7004.

Form 3520 is due on the same date as the U.S. person’s income tax return, including extensions. For most individual grantors, this means April 15, with an automatic extension to October 15 if the grantor files Form 4868 to extend the income tax return. A substitute Form 3520-A, if needed, is due by the Form 3520 deadline rather than the earlier March 15 date.

Both forms are filed on paper by mail to the IRS Service Center in Ogden, Utah. Neither form can be filed electronically. This is a notable difference from FBAR, which must be filed electronically through FinCEN’s BSA E-Filing System. The paper filing requirement means that filers should retain proof of mailing (certified mail return receipt is standard practice) and should account for postal transit time when filing close to the deadline.

The March 15 deadline for Form 3520-A is the single most commonly missed deadline in Cook Islands trust compliance. CPAs accustomed to the April 15 tax return cycle sometimes overlook the earlier date. The safest practice is to file Form 7004 automatically every year to extend the Form 3520-A deadline to September 15, providing adequate time to gather financial information from the Cook Islands trust companies and prepare the form properly.

Obtaining an EIN for the Trust

Form 3520-A requires the foreign trust to have an Employer Identification Number (EIN) issued by the IRS. A Cook Islands trust does not have a Social Security number or other U.S. taxpayer identification number by default, so the grantor or the CPA must apply for an EIN on the trust’s behalf.

An EIN can be obtained online through the IRS website if the applicant has a U.S. address, or by phone at 267-941-1099 if the trust’s principal place of business is outside the United States. The EIN application requires basic identifying information about the trust, including the trustee’s name and address and the grantor’s taxpayer identification number.

The EIN should be obtained as early as possible after the trust is established, ideally during the first year of the trust’s existence. Delays in obtaining an EIN can cascade into missed filing deadlines, because Form 7004 (the extension request for Form 3520-A) requires the trust’s EIN.

What Information the Trustee Must Provide

Accurate and timely Form 3520-A preparation depends on the Cook Islands trustee providing detailed financial information to the U.S. grantor’s CPA. The information typically needed includes year-end account statements from all bank and brokerage accounts held by the trust, a summary of all income earned during the year (broken down by type: interest, dividends, capital gains, and other income), a summary of all trust expenses (trustee fees, bank fees, legal fees, and other administrative costs), a record of any distributions made to beneficiaries during the year, and a schedule of all assets held by the trust at year-end with their fair market values.

Cook Islands trustees are accustomed to providing this information because U.S. compliance is a routine part of administering trusts for U.S. grantors. However, the information must be requested early. Trustees operate in a different time zone, compile information from multiple financial institutions, and may take several weeks to assemble a complete reporting package. Requesting documentation in January or February provides adequate lead time for even the March 15 deadline (or the September 15 extended deadline).

The quality of the trustee’s reporting package varies among trust companies. Some trustees provide detailed year-end reporting packages with income breakdowns and balance sheets already formatted for U.S. tax compliance. Others provide only raw account statements, leaving the CPA to extract and categorize the information. The grantor’s CPA should establish early in the relationship what format the trustee’s reports will take and whether any supplemental information will be needed.

Penalties

Section 6677 of the Internal Revenue Code governs penalties for failure to file Forms 3520 and 3520-A. The penalty structure varies by which part of the form is involved.

For Form 3520 Part I (failure to report the creation of or transfers to a foreign trust), the penalty is the greater of $10,000 or 35 percent of the gross value of the property transferred. A grantor who transfers $1 million to a Cook Islands trust and fails to report the transfer on Form 3520 faces a potential penalty of $350,000.

For Form 3520 Part II (failure to report ownership of a foreign trust under the grantor trust rules), the penalty is the greater of $10,000 or 5 percent of the gross value of the trust assets treated as owned by the grantor at year-end. A grantor treated as owning $2 million in trust assets who fails to complete Part II faces a potential penalty of $100,000.

For Form 3520 Part III (failure to report distributions received from a foreign trust), the penalty is the greater of $10,000 or 35 percent of the gross distributions received. A grantor who receives a $200,000 distribution and fails to report it faces a potential penalty of $70,000.

For Form 3520-A (failure to file the trust’s annual information return), the penalty falls on the U.S. owner if the trust does not file and the owner does not file a substitute. The penalty is the greater of $10,000 or 5 percent of the gross value of the trust assets treated as owned by the U.S. person at year-end.

In addition to the initial penalties, continuation penalties of $10,000 per 30-day period apply if the IRS mails a notice of failure and the filer does not comply within 90 days. These continuation penalties are capped at the total value of the unreported transfers, assets, or distributions, depending on the part of the form involved.

The 2024 Policy Change on Automatic Penalties

In October 2024, IRS Commissioner Danny Werfel announced that the IRS would stop automatically assessing penalties on late-filed Forms 3520 and 3520-A. This change addressed a practice that had drawn sustained criticism from the National Taxpayer Advocate, the AICPA, and tax practitioners.

Under the prior practice, the IRS imposed penalties automatically the moment a late filing was processed, without reading any reasonable cause statement the taxpayer had attached. Taxpayers who voluntarily filed late and included an explanation were penalized immediately and then forced to appeal the penalty through the IRS Independent Office of Appeals, a process that could take months or years. The Taxpayer Advocate reported that from 2018 to 2021, the IRS abated 67 percent of the penalties assessed on late-filed Forms 3520 and 3520-A, representing over $224 million per year in penalties that were assessed and then reversed.

Under the new policy, the IRS reviews reasonable cause statements before assessing penalties. This means a taxpayer who files late with a credible explanation may avoid penalty assessment entirely, rather than having to contest an automatic assessment after the fact.

The policy change is significant but has limits. It does not eliminate the penalties. It does not guarantee that a reasonable cause statement will be accepted. And it does not change the statutory penalty amounts. The change affects procedure, not substance. Filing on time remains the safest course, and taxpayers who are late should include a detailed, signed reasonable cause statement with every late filing.

Reasonable Cause

Section 6677(d) provides that penalties will not be imposed if the failure to comply was due to reasonable cause and not willful neglect. The IRS has not published detailed guidance on what constitutes reasonable cause specifically for Forms 3520 and 3520-A, but general principles from other penalty contexts apply.

Factors that support reasonable cause include reliance on the advice of a qualified tax professional who was given complete and accurate information, first-time violations by taxpayers who promptly corrected the failure upon discovering it, circumstances beyond the taxpayer’s control (such as natural disasters, serious illness, or unavoidable delays in receiving information from the foreign trustee), and lack of awareness of the filing requirement despite exercising ordinary business care and prudence.

Factors that weaken a reasonable cause argument include repeated failures across multiple years, large unreported amounts, failure to engage a qualified tax professional, and evidence that the taxpayer was aware of or willfully blind to the reporting requirement.

The reasonable cause statement should be written, signed under penalties of perjury, and attached to the late-filed form. It should specifically describe the facts that caused the late filing, identify what steps the taxpayer took to comply, and explain why those steps were insufficient. Generic statements (“I didn’t know I had to file”) are less effective than detailed narratives with supporting documentation.

Coordination Between Forms 3520 and 3520-A

The two forms are interconnected. Form 3520-A generates the Foreign Grantor Trust Owner Statement and Foreign Grantor Trust Beneficiary Statement that are then attached to Form 3520. If Form 3520-A has not been filed, the grantor cannot properly complete Part II of Form 3520 without filing a substitute Form 3520-A.

In practice, the CPA typically prepares both forms concurrently. The trustee provides financial information, the CPA prepares Form 3520-A and generates the owner and beneficiary statements, the trustee reviews and signs Form 3520-A, and the CPA then prepares Form 3520 using information from the signed 3520-A. Both forms are mailed to the Ogden, Utah service center, though they are mailed separately (Form 3520 goes with the individual’s tax return mailing cycle; Form 3520-A is a standalone filing).

If the CPA also handles the grantor’s FBAR filing and Form 8938, all four obligations can be coordinated in a single compliance cycle. The information needed for each form overlaps substantially, and preparing them together reduces the risk that one form is overlooked.

Schedule B, Part III

In addition to Forms 3520 and 3520-A, the grantor must answer the foreign trust questions on Schedule B, Part III of their individual tax return (Form 1040). This section asks whether the taxpayer was the grantor of or transferor to a foreign trust during the tax year, and whether the taxpayer received a distribution from a foreign trust. Checking “yes” on these questions alerts the IRS that Forms 3520 and 3520-A should have been filed, creating an internal cross-reference.

Failing to check these boxes when they should be checked can itself be a compliance issue, and checking “yes” without filing the corresponding Forms 3520 and 3520-A creates an obvious audit flag. The Schedule B questions should be reviewed annually as part of the tax return preparation process.

Gift Tax Considerations

The initial funding of a Cook Islands trust may have gift tax implications depending on the trust’s structure. If the trust is irrevocable and the grantor transfers assets to it, the transfer may constitute a completed gift subject to federal gift tax reporting on Form 709. Whether the gift is “complete” for gift tax purposes depends on the powers retained by the grantor and the terms of the trust deed.

Many Cook Islands trust deeds are structured so that the grantor retains sufficient powers (through a trust protector or retained beneficial interest) to argue that the transfer is an incomplete gift, deferring gift tax consequences. However, this analysis is fact-specific and depends on the precise trust terms. The gift tax question is separate from the Form 3520 reporting requirement. Even if the transfer is not a completed gift, it must still be reported on Form 3520 Part I as a transfer to a foreign trust.

Gift tax analysis should be completed at the time the trust is established, in coordination with the attorney structuring the trust and the CPA handling tax compliance. The annual compliance costs for Cook Islands trusts typically include ongoing review of gift tax exposure as part of the broader reporting package.

Statute of Limitations

The statute of limitations for assessing penalties on Forms 3520 and 3520-A does not begin running until a complete and accurate form has been filed. If no form is filed, there is no statute of limitations. The IRS can assess penalties for an unfiled Form 3520 or 3520-A at any time, even decades after the original due date.

This unlimited assessment period is one of the most consequential features of the penalty framework. A grantor who establishes a Cook Islands trust in 2020, fails to file Forms 3520 and 3520-A for that year, and is not contacted by the IRS until 2035 still faces the full penalty for the 2020 filing year. There is no point at which the failure becomes too old to penalize.

The same rule applies to the grantor’s income tax return when Form 8938 is also required. Failure to file Form 8938 suspends the three-year statute of limitations for the entire tax return. The combination of unfiled Forms 3520, 3520-A, and 8938 can leave a grantor exposed to IRS examination and penalty assessment indefinitely.

For comprehensive information about Cook Islands trust structure, formation, and administration, return to the Cook Islands trust overview.