IRS Forms 8938 and 3520 for Foreign Equity Vehicles: Reporting Thresholds

A US citizen working for a UK tech employer holds unvested RSUs in a UK employee benefit trust structure. The trust holds the shares until vest, then distributes them to employees. She files her US Form 1040 each year, reports the vest income, and pays tax.

Her preparer does not file Form 8938 or Form 3520 because he treats the UK trust as the employer’s, not hers. Three years later she gets an IRS notice: the trust’s vesting vehicle is a foreign trust with US beneficiaries, and she has failed to file Form 3520 for three years. Initial penalty: $10,000 per year, with compounding and interest.

Foreign equity-compensation vehicles frequently trigger US reporting obligations that the taxpayer does not realize apply. Form 8938 (FATCA), Form 3520 (foreign trusts), FBAR (foreign bank accounts), and sometimes Form 5471 (foreign corporations) can each have thresholds that are easy to trip and penalties that are harsh.

Form 8938: FATCA reporting

Form 8938 is the Statement of Specified Foreign Financial Assets, filed as part of the annual Form 1040. IRC §6038D (added by FATCA in 2010) requires US persons to report interests in “specified foreign financial assets” above thresholds.

Thresholds for 2025 (single filers living in the US):

• $50,000 at year-end, or
• $75,000 at any point during the year.

Thresholds for MFJ in US: $100K year-end / $150K peak.

Thresholds for taxpayers living abroad (US citizens abroad, bona fide residents): $200K single / $400K MFJ year-end, with higher peak thresholds.

“Specified foreign financial assets” include:

• Foreign bank and brokerage accounts.
• Foreign equity and debt interests (stocks, bonds of foreign companies held outside financial institutions).
• Interests in foreign pensions, retirement plans, deferred comp plans.
• Foreign mutual funds, ETFs, exchange funds.
• Foreign trusts where the US person is grantor, beneficiary, or has other specified interests.

For employees with foreign employer equity:

• Unvested RSUs or options in a foreign employer’s stock plan, held in a foreign account or trust structure, can be reportable.
• Vested stock held in a foreign brokerage or through the employer’s foreign plan administrator is reportable.
• If vested stock is held in a US brokerage (E*Trade, Fidelity), Form 8938 may not apply because the account is US.

Form 3520 and 3520-A: foreign trusts

Form 3520 reports transfers to and distributions from foreign trusts. Form 3520-A reports the trust’s annual income.

A US person is required to file Form 3520 if they:

• Receive a distribution from a foreign trust.
• Are treated as owner of a foreign trust under the grantor trust rules.
• Receive gifts or bequests over $100,000 from a foreign person or estate.

Employee benefit trusts (EBTs) used in UK, Australian, Irish, and other foreign jurisdictions to hold shares prior to vesting are often foreign trusts for US purposes. A US-citizen employee who is a beneficiary of such a trust may have Form 3520 filing obligations for:

• The initial grant (transfer of shares to the trust on the employee’s behalf).
• Each vest event (distribution from trust to employee).
• Possibly Form 3520-A if treated as owner (uncommon for EBTs but possible).

Penalties for Form 3520 failures are severe. Initial penalty is 35% of the gross reportable amount for transfers/distributions, or $10,000, whichever is greater. Late-filing penalties continue to accrue.

The IRS has been aggressive on Form 3520 penalties in recent years, sometimes assessing penalties on trusts that are clearly employee benefit arrangements. Penalty abatement has had some success via private letter rulings and revenue procedures (Rev. Proc. 2020-17 exempts certain foreign retirement plans).

FBAR (FinCEN 114)

FBAR is filed with FinCEN, not the IRS. Threshold: $10,000 aggregate across all foreign financial accounts at any point during the year.

FBAR includes foreign bank accounts, brokerage accounts, and, in some interpretations, foreign employer equity accounts held outside the employer’s US systems.

Penalty for non-willful failure: up to $10,000 per violation per year. Willful failure: up to the greater of $100,000 or 50% of the account balance.

FBAR is often missed for employees who hold foreign equity in an employer-arranged foreign account (for example, a Swiss account holding vested SIX-listed employer stock).

Form 5471 and PFIC considerations

Less commonly for equity-comp, but sometimes triggered:

• Form 5471 if the employee owns 10%+ of a foreign corporation. Rare for line employees but possible for founders with foreign entities.
• PFIC (Passive Foreign Investment Company) rules if the employee holds foreign mutual funds or ETFs. Investments can trigger IRC §1291 fund treatment, with adverse tax consequences. See the PFIC article in this series.

Comparison of reporting forms

Form	Threshold	Due date	Typical penalty	What it catches
Form 8938	$50K+ year-end (US resident, single)	With Form 1040	$10K + $10K per 30 days after notice	Foreign equity, pensions, accounts
Form 3520	Any distribution/transfer, $100K gift	April 15 (extended with 1040)	35% of amount or $10K	Foreign trusts, foreign gifts
Form 3520-A	Ownership of foreign trust	March 15	5% of trust assets	Grantor-trust ownership of foreign trust
FBAR (FinCEN 114)	$10K aggregate	April 15 (auto extension to Oct 15)	$10K non-willful per year	Foreign financial accounts
Form 5471	10%+ of foreign corporation	With 1040	$10K + continuation	Foreign company ownership

Coordination: which form for which fact pattern

Employee with foreign employer stock held in a US brokerage:

• Form 8938: probably not (US account).
• Form 3520: only if a foreign trust is in the chain.
• FBAR: no.

Employee with foreign employer stock held in a foreign stock-plan account:

• Form 8938: yes if over threshold.
• Form 3520: yes if the plan uses a foreign trust for holding shares.
• FBAR: yes if over $10K.

Employee with foreign employer stock held in a foreign benefit trust (EBT):

• Form 8938: yes.
• Form 3520: yes, for trust-related events.
• Form 3520-A: possibly, depending on trust structure and employee’s interest.
• FBAR: depends on account classification.

Employee receiving a cash distribution from an overseas pension or equity plan at retirement:

• Form 8938: yes on the underlying account.
• Form 3520: potentially, on the distribution itself.
• FBAR: yes.

Common failures

Treating employer-plan vehicles as “not mine.” The vesting trust is not the employee’s outright, but it is a reportable interest. Employees assume their employer handles all reporting; the employer reports compensation income on their UK or US payroll, not the US trust forms.

Missing the threshold in a year. Peak-year thresholds are often higher than year-end. A vest event mid-year can push the account over peak threshold even though year-end balance is low.

Not filing 3520 for a one-time distribution. Receiving 50,000 shares on a vest from a UK EBT is a distribution event. Even if it’s just once, Form 3520 is required.

Assuming the preparer will flag it. Many US preparers without cross-border experience miss these forms. The taxpayer bears the filing burden.

Frequently asked

If my foreign employer RSUs are held in a US-based account administered by a third party, do I still need Form 8938? Generally no. US accounts are excluded. But confirm: some employer arrangements use foreign sub-accounts that are not US-sourced even if the administrator is US-based.

Do I need Form 3520 if the foreign trust distributes shares to my US brokerage? The distribution event itself is still reportable if the trust is a foreign trust.

What is the statute of limitations on these failures? The IRS can assess penalties within the standard statute (3 years, or 6 years if substantial omission), but the statute does not start until the relevant form is filed. Unfiled Form 3520s keep the statute open indefinitely.

Is there a voluntary disclosure path? Yes. The Streamlined Filing Compliance Procedures and the Delinquent International Information Return Submission Procedures offer options to cure past failures with reduced or no penalties, depending on circumstances.

Do I need to report stock held in a foreign ESPP? Generally yes, if the account or stock is foreign. Same thresholds apply.

Next step

If you hold any equity in a foreign-country employer or a foreign-domiciled benefit vehicle, pull your 2025 year-end statements today. Compare against Form 8938 and FBAR thresholds. If you have a foreign trust in the chain (ask your employer or stock plan administrator), determine whether Form 3520 applies. Consult a cross-border tax preparer this week; these forms have April 15 filing deadlines and meaningful penalties.