1. A Familiar Situation
It usually happens late in an engagement. A long-standing individual client mentions an inheritance from a parent overseas, a distribution from a family trust abroad, or a retirement or savings account opened years ago in another country. The practitioner opens the firm's tax software to add Form 3520 and finds one of several things:
- The form is available, but as a data-entry screen with little or no calculation or validation behind it.
- Some parts are supported and others are not, or are supported only for common fact patterns.
- Form 3520-A, or a substitute Form 3520-A, has to be prepared somewhere else.
- The supporting computations, such as the Part III treatment of distributions from a foreign non-grantor trust, have to be built in a spreadsheet.
None of this is unusual, and it is not a criticism of any particular product. It reflects how tax software is built and where development money goes.
2. Why the Gap Exists
A professional tax suite serves tens of thousands of firms. Its development roadmap is driven by the returns those firms prepare most often: individual, partnership, corporate, fiduciary, and state returns, plus the e-file and diagnostic infrastructure that supports them. Every annual form revision across those returns has to ship on time.
Foreign trust and foreign gift returns sit at the opposite end of the distribution. A typical small or mid-size firm may prepare a few each year; many prepare none. For a general-purpose vendor, building deep logic for low-volume returns, with thresholds, aggregation rules, multi-year history, and default calculation methods, competes for engineering time with everything else. The rational outcome is form-level coverage: the boxes are there, but the analysis is left to the preparer.
Several features of these returns make that outcome more likely:
Paper filing
Forms 3520 and 3520-A are filed on paper, separately from the e-filed income tax return. They fall outside the e-file schemas and diagnostic framework that drive most software validation. See Can Form 3520 or 3520-A Be E-Filed?
Different filers, different deadlines
Form 3520 is filed by the U.S. person; Form 3520-A is the foreign trust's return, with its own EIN, its own March 15 due date, and its own extension on Form 7004 (Code 27). That does not fit neatly inside a single client's individual return. See Form 3520 & 3520-A Due Dates by Year.
Multi-year history
Part III computations for distributions from a foreign non-grantor trust can depend on prior-year distributions and the trust's accumulation history. Software that treats each return as a standalone year cannot do this without the preparer rebuilding the history.
Judgment before data entry
Many of the important decisions, such as whether an arrangement is a trust at all, or whether gifts from several people must be aggregated, happen before anything is typed into a form. Form-entry software assumes those decisions have already been made correctly.
3. Why Basic Coverage Is Not Enough for These Forms
On most information returns, thin software support costs the preparer some time. On Forms 3520 and 3520-A, the penalty structure means a missed item can cost the client a significant share of the underlying amount:
- Foreign trust transactions (IRC § 6677(a)): the greater of $10,000 or 35% of the gross reportable amount for Part I and Part III failures, including incomplete or incorrect information.
- Foreign trust ownership (IRC § 6677(b)): the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person, when Form 3520-A is not filed or is incomplete.
- Foreign gifts and bequests (IRC § 6039F): 5% of the amount of the gift for each month the failure continues, up to 25%.
Relief generally turns on showing reasonable cause and not willful neglect, and the filer carries that burden. For the framework, see Form 3520 Penalty Relief & Reasonable Cause.
Software limitations have already reached the courts. In one recent case, a federal court allowed a taxpayer's claim that reliance on tax software constituted reasonable cause to proceed past a motion to dismiss (see Huang v. United States). That is a long and uncertain road. It is far better for the return to be right the first time.
The errors that drive these penalties are rarely typos. They tend to fall into a few categories that form-entry software does little to prevent:
Classification
Whether a foreign arrangement is a trust for U.S. tax purposes, and if so whether it is a grantor or non-grantor trust, determines which parts of Form 3520 apply and whether Form 3520-A is required at all. Some arrangements that look like trusts are not treated as trusts (for example, Mexican land trusts under Rev. Rul. 2013-14). Some foreign savings and retirement trusts are exempt under Rev. Proc. 2020-17, while others, such as Canadian TFSAs, generally do not meet its requirements.
Aggregation
The Part IV threshold for gifts and bequests from nonresident alien individuals and foreign estates (more than $100,000 for the year) is applied after aggregating gifts from persons related to one another. Gifts from foreign corporations and partnerships use a much lower, inflation-adjusted threshold. Two parents each giving $60,000 can trigger reporting even though neither gift alone would.
Calculation
For distributions from a foreign non-grantor trust, the beneficiary needs either a Foreign Nongrantor Trust Beneficiary Statement or must use the default method, under which the portion of distributions exceeding 125% of the average distributions of the prior three years is treated as an accumulation distribution, with throwback tax and an interest charge. This is multi-year arithmetic that a data-entry screen does not perform.
Trust-level reporting
When the foreign trustee does not file Form 3520-A, the U.S. owner generally must prepare a substitute Form 3520-A and attach it to Form 3520, including the trust's income statement and balance sheet and the owner and beneficiary statements. That is a second return, built from foreign trust records, attached to the first.
New requirements
Form 708, for U.S. recipients of covered gifts and bequests from covered expatriates under IRC § 2801, is a new return. No product has years of field experience with it, and practitioners should expect support to vary. See our Form 708 overview.
4. Common Workarounds and Their Costs
Firms that run into the gap usually fall back on one of three approaches. Each one works, and each one has a cost.
| Approach | What it gets right | What it costs |
|---|---|---|
| IRS fillable PDF | Free; produces the official form. | No calculations, no validation, no carryforward. Every threshold test and computation is manual, and the data must be re-entered every year. |
| Firm-built spreadsheets | Flexible; can handle multi-year history. | Hard to review, easy to break, and dependent on the one person who built them. Formulas are rarely re-checked against current instructions. |
| Referring the return out | Puts the work with a specialist. | Higher cost to the client, coordination with the main return, and a second firm inside the client relationship. |
5. A Checklist for Evaluating Any Tool
The most useful test is a real one: take a client fact pattern from last season (or build a realistic one) and run it through the software. The questions below apply to any product, including your current suite and including ours.
- Part identification. Does it help determine which parts of Form 3520 apply (transfers, ownership, distributions, gifts), or does it assume you already know?
- Gift aggregation. Does it aggregate gifts from related foreign persons and apply the correct threshold for individuals and estates versus foreign entities?
- Part III distributions. Does it compute the default method, including the three-year average, accumulation distribution, and interest charge, or does it provide a line for a number you calculate elsewhere?
- Beneficiary statements. Does it accommodate an actual-method calculation when the trust provides a Foreign Nongrantor Trust Beneficiary Statement?
- Form 3520-A. Can it prepare a standalone Form 3520-A for the trust, and a substitute Form 3520-A when the trustee does not file?
- Extensions. Can it prepare Form 7004 (Code 27) for the trust, and does it track the different deadlines for Form 3520 and Form 3520-A?
- Carryforward. Does it retain the trust, its owners and beneficiaries, and distribution history from year to year?
- Filing package. Does it produce a complete paper package with the correct Ogden mailing address and guidance on proof of timely mailing under IRC § 7502?
- Late filings. Does it support delinquent prior-year returns using the correct form revision for each year?
- Form 708. If you have clients receiving gifts or bequests from covered expatriates, does it support Form 708?
If the answer to several of these is "no," the gap is not a reason to switch your main tax software. It is a reason to handle these returns differently.
6. Alongside, Not Instead
Because Forms 3520 and 3520-A are filed separately from the income tax return, there is no technical reason they must be prepared in the same software. Many practitioners keep their primary suite for the Form 1040 and the e-file workflow, and use a dedicated tool for the foreign trust and foreign gift information returns.
The economics follow the risk. These returns are few in number, but each one carries penalty exposure measured as a percentage of the underlying trust assets, transactions, or gifts. Software purpose-built for that narrow set of returns can spend its effort where general-purpose software cannot: classification prompts, aggregation, multi-year computations, trust-level returns, and complete paper filing packages.
7. Frequently Asked Questions (FAQ)
Does professional tax software support Form 3520?
Coverage varies by product and by part of the form. Some general-purpose suites offer full form entry, some offer limited support for particular parts, and some calculations, such as the Part III default method for accumulation distributions, may require work outside the software. Practitioners should test their own software against the specific facts of each return rather than assume full support.
Can Form 3520 be e-filed through tax software?
No. Form 3520 is filed on paper with the IRS Service Center in Ogden, Utah, separately from the e-filed income tax return. Form 3520-A is likewise filed on paper. Software can prepare the forms, but the filing itself is a paper submission, and proof of timely mailing under IRC § 7502 matters.
Is the IRS fillable PDF enough to prepare Form 3520?
The IRS fillable PDF can produce a valid paper form, but it performs no calculations, applies no validation, and does not carry data forward to the next year. The preparer is responsible for every threshold test, aggregation, and computation, which is where most errors on these returns occur.
Who prepares a substitute Form 3520-A?
When a foreign trust with a U.S. owner does not file Form 3520-A, the U.S. owner generally must complete and attach a substitute Form 3520-A to the owner's own Form 3520 to avoid the § 6677(b) penalty. The substitute follows the Form 3520 due date, including extensions.
Do I have to replace my main tax software to prepare Form 3520?
No. Form 3520 and Form 3520-A are filed separately from the income tax return, so many practitioners keep their primary suite for the Form 1040 and use a dedicated tool only for the foreign trust and foreign gift information returns.
Run the Checklist Against Agena Software
Agena Software is built only for Forms 3520, 3520-A, 708, and the Form 7004 trust extension. Keep your main suite for the 1040 and prepare the foreign trust and gift returns here, with print-ready filing packages and Ogden mailing checklists.