Help Needed with Form 3520 for TFSA on US Tax Return

This is a common confusion point for Canadians moving to the US. The IRS has gone back and forth on how TFSAs should be reported. The current guidance is that a TFSA is generally considered a foreign trust for US tax purposes, which technically would require Form 3520. However, in 2020, the IRS released guidance suggesting they wouldn't penalize taxpayers who didn't file Form 3520 for their TFSAs, but this hasn't been formally codified into tax law. To be safe, you should definitely report the TFSA on Form 8938 (Statement of Foreign Financial Assets) if you meet the reporting threshold. For Form 3520, many tax professionals recommend filing it to be completely compliant and avoid potential penalties, even with the informal guidance. The most important thing is that you report any income generated by the TFSA on your US tax return. Unlike in Canada, the TFSA is NOT tax-free for US tax purposes. Any interest, dividends, or capital gains must be reported as income.

I was in the exact same boat last year after moving from Toronto to Seattle. I spent weeks going in circles about how to report my TFSA until I found taxr.ai (https://taxr.ai). Their system analyzed my TFSA statements and gave me a clear breakdown of exactly what forms I needed to file. Turns out I needed both Form 8938 and Form 3520 in my situation because of the specific investments in my TFSA. They even provided a detailed explanation document I could give to my accountant explaining why certain reporting was needed. Saved me tons of time figuring out those complicated foreign account rules!

I wanted to follow up about my experience with taxr.ai after questioning it here. I decided to try it for my TFSA situation and I'm really glad I did. The system flagged that my TFSA contained mutual funds that were PFICs requiring Form 8621 - something my tax preparer had completely missed last year! It gave me a detailed report breaking down exactly why I needed Form 8938, Form 3520, AND Form 8621 based on my specific investments and account value. The document explained everything in plain English that I could understand. I sent the report to my accountant who confirmed it was correct and actually thanked me for making his job easier. Definitely worth it for the peace of mind alone.

If you're struggling to get clear answers about Form 3520 for your TFSA, you're not alone. I spent HOURS on hold with the IRS last tax season trying to get clarification. After multiple failed attempts, I used Claimyr (https://claimyr.com) and was connected to an IRS agent in about 15 minutes who actually specialized in international tax issues. The agent confirmed that while the IRS hasn't formally exempted TFSAs from Form 3520 reporting, they had internal guidance to not pursue penalties for failure to file Form 3520 solely for TFSAs if all income was properly reported. But she recommended filing it anyway if I wanted to be 100% compliant. Check out how it works here: https://youtu.be/_kiP6q8DX5c - saved me days of frustration!

I have to eat my words about Claimyr. After posting my skeptical comment, I tried it myself out of frustration after spending two mornings failing to reach the IRS about my own TFSA situation. The service actually worked exactly as described - I got a call back when a representative was available (took about 45 minutes in my case) and was connected to an IRS agent who transferred me to their international tax team. I got clear guidance that for my situation (TFSA with just index funds), I should file Form 8938 and report the income, but Form 3520 wasn't strictly required based on their current enforcement practices. The agent also emailed me some specific IRS bulletins I hadn't found in my own research. Definitely worth it compared to the hours I wasted on hold.

Just want to point out that there's a lot of confusion around TFSAs because the IRS has never issued a definitive ruling. The safest approach is to report it on both Form 8938 and Form 3520. Yes, it's extra paperwork, but the potential penalties for non-filing are massive. I've been filing both forms for my TFSA for the past 3 years. My TFSA has about $65k in it, and my accountant charges me an extra $350 to prepare these forms, but it's worth the peace of mind. Just make sure you're also reporting any income from the TFSA on your regular tax return.

Another option nobody mentioned - you could elect to treat your TFSA as a foreign grantor trust and file Form 3520-A instead of Form 3520. This might sound more complicated, but some cross-border accountants prefer this approach because it provides more clarity on how to report income. Also, check if you're required to file FBAR (FinCEN Form 114) for your TFSA. The threshold is lower than Form 8938 - just $10,000 across all foreign accounts combined at any point during the year.

I went through this exact situation two years ago when I moved from Vancouver to California. The TFSA reporting requirements are genuinely confusing because the IRS guidance has been inconsistent over the years. Here's what I learned after consulting with a cross-border tax specialist: You'll likely need to file Form 8938 since your TFSA value exceeds the threshold ($50k for single filers living abroad, but lower thresholds apply once you become a US resident). For Form 3520, while the IRS has indicated they won't aggressively pursue penalties for TFSAs, many professionals still recommend filing it for complete compliance. The most important thing people don't realize is that you need to report ALL income generated by your TFSA on your US tax return - interest, dividends, capital gains, everything. The "tax-free" benefit only applies in Canada, not for US tax purposes. Given the complexity and potential penalties, I'd strongly suggest finding a CPA who specializes in US-Canada cross-border tax issues, even if it's just for a consultation. The peace of mind is worth the cost, and they can help you decide whether to keep the TFSA or close it based on your long-term plans. Also don't forget about FBAR filing if your combined foreign accounts exceed $10k at any point during the year - that's separate from the other forms and has its own penalties for non-compliance.