The Forms Are the Point.

We think it is worth a closer look — not for what it changes, but for what it confirms. Because the single most persistent misconception in our field is the belief that an offshore structure protects wealth by hiding it. Forms 3520 and 3520-A exist to make that belief impossible to hold. They are the proof, printed on IRS letterhead, that a legitimate offshore trust is one of the most fully reported structures a U.S. person can own — and that its protection comes from somewhere other than secrecy.

The reporting regime rests on a small cluster of Internal Revenue Code sections, and it is worth naming them, because clients are often surprised by how comprehensive they are.

Section 6048 requires a U.S. person to report three categories of dealing with a foreign trust: the creation of the trust and transfers of property to it; the U.S. person’s ownership of a foreign trust under the grantor-trust rules; and the receipt of distributions from it. That reporting is done on Form 3520, the “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” (I.R.C. §6048(a), (c)).

Section 6048(b) goes further. It makes the U.S. owner of a foreign trust responsible for ensuring that the trust itself files an annual information return laying out all of its activities, its U.S. beneficiaries, and each U.S. person treated as an owner of any portion of it under the grantor-trust rules of sections 671 through 679. That return is Form 3520-A, the “Annual Information Return of Foreign Trust With a U.S. Owner” (I.R.C. §6048(b); the grantor-trust ownership rules of I.R.C. §§671–679, including §679 governing foreign trusts with U.S. beneficiaries).

And Section 6039F captures the other half of the picture: large gifts or bequests received from foreign persons, reported in Part IV of Form 3520 (I.R.C. §6039F).

Read together, these provisions describe a structure that is anything but opaque to the U.S. government. The existence of the trust, the identity of its settlor and its U.S. beneficiaries, the property transferred into it, the income it earns, and the distributions it pays out are all reported annually, by name, on penalty of severe sanction. Whatever an offshore trust is, in the eyes of the Internal Revenue Service it is not a secret.

The reason these forms command attention is the price of getting them wrong. The penalty machinery is unusually harsh. Under section 6677, a failure to report a transfer to, or a distribution from, a foreign trust exposes the U.S. person to a penalty of 35% of the amount involved. Under section 6039F, a failure to report a qualifying foreign gift can reach 25% of the gift (I.R.C. §6677(a), generally the greater of $10,000 or 35% of the gross reportable amount, with a 5% penalty for certain §6048(b) ownership failures; I.R.C. §6039F(c), 5% of the gift for each month, up to 25%). These are penalties measured against the corpus, not against tax due — which is what makes them so punishing, and so feared.

Here is the point that matters for planning. A regime that punishes non-disclosure at 25% and 35% of the assets involved is a regime built on the premise that the assets will be disclosed. The law does not offer a discount for a well-hidden trust; it offers a catastrophe. The entire architecture assumes — indeed insists — that a legitimate foreign structure reports itself fully and on time. Concealment is not a feature the statute tolerates and prices; it is the exact conduct the statute is designed to destroy.

That is the first lesson of the 3520 regime, and it is the same lesson we drew from Chishti: concealment does not protect wealth. It manufactures liability. A U.S. person who parks assets in a foreign trust and declines to report it has not built a shield. He has bought a 35% penalty, tolled the statute of limitations on his entire return under section 6501(c)(8), and — if the omission was willful — handed a prosecutor the outline of a case.

There is a development in the background of this notice that clients should understand, because it points precisely the way our planning already points.

For years the IRS automatically assessed the maximum 3520 penalty the moment a form was filed late — including on taxpayers who came forward voluntarily to report a foreign gift or inheritance they had simply not known was reportable. The results were indefensible. The National Taxpayer Advocate reported that, for tax years 2018 through 2021, the IRS ultimately abated 67% of the Part IV penalties it assessed, and 78% of the dollars — a rate of reversal that told its own story about how many of those penalties should never have been imposed (National Taxpayer Advocate, IRS Hears Concerns From TAS and Practitioners, Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties (Oct. 2024)).

On October 24, 2024, the IRS Commissioner announced that the agency would stop automatically assessing penalties on late-filed Forms 3520 reporting foreign gifts and bequests, and would instead review any reasonable-cause statement attached to a late filing before deciding whether a penalty is warranted (IRS to end automatic penalties for late filing of foreign gift, bequest forms, Journal of Accountancy (Oct. 25, 2024)). It was a meaningful, welcome correction.

Notice what it rewards. The relief runs to the taxpayer who files — even late, even imperfectly — and who explains himself in good faith. It does nothing for the taxpayer who never filed at all and hoped the trust would stay invisible. The IRS softened its posture toward disclosure with a good reason; it did not soften its posture toward concealment. That distinction is the whole of sound offshore planning, expressed as enforcement policy.

The 3520 landscape is still moving, and this comment notice sits on top of a larger, unfinished project. In May 2024 the Treasury issued proposed regulations (REG-124850-08) under sections 643(i), 679, 6039F, 6048, and 6677 — the first comprehensive proposed guidance on foreign-trust reporting in decades. Among other things, the proposal would exempt certain tax-favored foreign trusts — those established and operated exclusively or almost exclusively to provide pension, retirement, medical, disability, or educational benefits — from the Form 3520/3520-A regime for eligible individuals, and taxpayers may rely on the proposal for tax years ending after May 8, 2024 pending final rules (89 Fed. Reg. 39440 (proposed May 8, 2024) (REG-124850-08)).

Two takeaways for clients. First, the reporting rules are being tightened and clarified, not relaxed into irrelevance; the direction of travel is toward more precise, better-defined disclosure, not less of it. Second, a July 2026 PRA notice asking the public to comment on the burden of these forms is exactly the kind of routine step an agency takes when a form is under active revision. Whether or not the burden estimate in the notice — on the order of two thousand aggregate hours across the affected filers, and, per Paperwork Reduction Act convention, an agency estimate rather than a count of the total filing population — captures everyone, the signal is clear enough: these forms are being maintained, examined, and kept current. Anyone building a plan around the hope that foreign-trust reporting will quietly lapse is planning against the tide.

Set the bureaucratic notice aside and take the enduring point. A properly built offshore structure and the 3520 regime are not adversaries. They are complements. The protection a seasoned, irrevocable, independently administered trust provides has never depended on the government not knowing it exists. It depends on four things the Internal Revenue Code cannot touch:

1. It is seasoned. The structure is funded years before any claim, when there is no creditor to hinder and therefore no fraudulent intent to infer. A timely, accurate Form 3520 filed at the outset is contemporaneous proof of exactly that — a dated, sworn record that the transfer happened on a clear day.

2. It is irrevocable and discretionary. The settlor does not keep a switch to flip when trouble comes. The benefit is discretionary, not guaranteed — which is why a creditor who learns everything about the trust from its filings still cannot compel a distribution the trustee has not chosen to make.

3. It is independently administered. A genuine, independent trustee holds and administers the assets. Disclosure of that arrangement does not weaken it; it corroborates it, and forecloses the alter-ego and sham arguments that sink self-controlled structures.

4. It is fully reported. The trust files its Forms 3520 and 3520-A, every year, on time. That transparency is not the enemy of protection. It is the evidence of legitimacy — the difference between a structure a court will respect and a “transfer” a court will unwind.

The client who fails these forms is not being clever. He is doing to his tax posture what Zia Chishti did to his balance sheet: creating a record of concealment that a determined adversary — there, a creditor; here, the IRS — will use as the centerpiece of the case against him. The badges of fraud and the badges of a bad 3520 filing are cousins. Both are what improvisation and secrecy leave behind.

It is fitting that the document prompting this note is so dull. Genuine asset protection is dull, in the best sense: forms filed on time, a trustee who actually administers, a structure that has stood undisturbed for years, and a paper trail that says, plainly and early, exactly what was done and when. The drama belongs to the other kind of planning — the panicked transfer, the undisclosed account, the trust that was supposed to stay invisible and did not.

Forms 3520 and 3520-A are a standing reminder that offshore does not mean unseen. The wealth held in a well-built foreign trust is fully visible to the United States government and, precisely because of that, fully defensible. The protection was never in the hiding. It was in the building.