When to Report Foreign Gift and Trust Transactions (Examples)

10 Facts About Form 3520 All Taxpayers Should Know

Reporting Foreign Gift and Trust Transactions 

The IRS Form 3520 is an international information reporting form that some U.S. Taxpayers are required to file to report foreign gifts and inheritances they receive from foreign persons — as well as to report foreign trust distributions and ownership of a foreign trust. The typical Form 3520 filing situation is when a Taxpayer receives a large gift or inheritance from a foreign person (including family members) and then fails to file the form timely — which may lead to fines and penalties. And, while there are generally no U.S. tax implications when a U.S. Taxpayer receives a large foreign gift or inheritance from non-residents, the penalties for failing to file a timely Form 3520 can be significant. Taxpayers who file Form 3520 more than five months late may be subject to a 25% penalty on the value of the unreported gift. There are separate penalties for Taxpayers who fail to report their ownership of a foreign trust.

*Golding & Golding previously published the 5 Facts About IRS Form 3520 You Should Know article back in 2021 and has since updated and expanded the list.

Who is Required to File Form 3520?

Taxpayers who are U.S. persons for income tax purposes and meet the Form 3520 reporting threshold are required to file Form 3520. For purposes of determining who must file Form 3520, ‘U.S. persons’ typically include:

• • • U.S. Citizens

    • Lawful Permanent Residents

    • Foreign Nationals who meet the Substantial Presence Test

It is also important to note that various domestic entities and trusts may also be required to file a Form 3520 — but for purposes of this summary, the focus is on individuals.

Form 3520 is Required Even if a Tax Return is not Required

Taxpayers who meet the threshold requirements for filing Form 3520 are required to file the form even if they are not required to file a tax return in that year. In other words, some Taxpayers may have to file Form 3520 even though they do not have to file a tax return.

• • • Example: Brenda is a U.S. citizen who is not required to file a tax return because she has no income. Her aunt is a foreign national common non resident alien who gifted her $300,000 in the current year. Even though Brenda does not have to file a tax return, she is still required to file it a Form 3520.

Taxpayer Received a Large Foreign Gift or Inheritance

The main catalyst that requires taxpayers to file Form 3520 is when they receive more than $100,000 from a non-resident alien (NRA) as either a single gift — or a series of gifts in the same year. It is important to note that if the gift comes from related persons, the value of each gift is aggregated and applied toward the +$100,000 threshold.  If the gift is from a foreign entity, the threshold is significantly lower.

• • • Example: Jake is a Lawful Permanent Resident who has family members overseas who are all non-U.S. persons. A few years ago, Jake received a $700,000 gift from his mom to help Jake purchase a home in the United States since Jake does not have any credit and cannot qualify for a mortgage. Jake is required to report this gift on Form 3520.

    • Example: Peter is a lawful permanent resident who has family members living abroad. His family got together, and each gave him a gift of $25,000, for a total value of $150,000. Even though not one individual family member gave Peter more than $100,000, the related party rules result in Peter receiving a gift of more than $100,000 from related family members and therefore Peter must file a Form 3520.

Form 3520 Includes More Than Just Cash Gifts

One common misconception is that Form 3520 only refers to cash gifts from foreign persons, but that is not true. For example, if a U.S. Taxpayer receives assets such as shares in a foreign family business or ownership of a foreign property, these are also counted as gifts and will go towards the +$100,000 threshold.

• • • Example: Janine is a U.S. citizen who has nonresident family members living overseas. Her non-resident alien grandmother gifted her a house worth $900,000. Even though Janine did not receive any money, she is still required to file a Form 3520.

The ‘Related Person’ Rules

The related person rules refer to U.S. Taxpayers who receive gifts from foreign persons who are related to each other. The related person rules mean that if the people who give the gifts are related, then the value of the gift that each related person gives is combined into an aggregate total. The purpose of this rule is to prevent related parties from splitting large gifts just so that the U.S. person can avoid having to report it on Form 3520.

As provided by the IRS:

• • • “To calculate the threshold amount ($100,000), you must aggregate gifts from different foreign nonresident aliens and foreign estates if you know (or have reason to know) that those persons are related to each other (see Related Person, earlier) or one is acting as a nominee or intermediary for the other. For example, if you receive a gift of $75,000 from Abby (a nonresident alien individual) and a gift of $40,000 from Brian (a nonresident alien individual), and you know that Abby and Brian are related, you must answer “Yes” and complete columns (a) through (c) for each gift.”

Currency Restrictions and Multiple Parties Giving Gifts

Many countries have currency restrictions regarding transferring money outside of the country.

• • • Example, Kenneth (a U.S. Citizen) receives a $500,000 gift from his dad (a Non-Resident Alien) who lives in China. The Chinese Government’s currency restrictions prevent Kenneth’s dad from transferring $500,000 out of China and into the United States. Therefore, Kenneth and his friends each transfer $50,000 to Kenneth. Even though each person only transferred $50,000 (and the parties may not be related) — the gift came from Kenneth’s dad, so Form 3520 would still be required.

Foreign Trust Distributions are Also Reportable

While there are different thresholds to determine whether or not a taxpayer meets the Form 3520 filing requirements when it is a gift from a foreign individual or entity, if the taxpayer receives a foreign trust distribution, the distribution is generally reportable even if it is a de minimis distribution. In other words, there is no threshold requirement when it involves trust distributions, and all trust distributions from a foreign trust received by a U.S. person are typically reportable on Form 3520.

What if You are the Owner of a Foreign Trust?

Taxpayers with an ownership interest in a foreign trust must also file Form 3520 (in addition to Form 3520-A).

As provided by the IRS:

• • • “You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.”

Treaty Election or Exception to the Substantial Presence Test

Some U.S. Taxpayers may avoid having to file certain international information reporting forms if they can show that they meet one of the exceptions, exclusions, or limitations to filing. For example, the Taxpayer may qualify to make a treaty election to be treated as a non-resident for tax purposes (although the Government may challenge the Taxpayer’s position) or qualify for an exception to the substantial presence test such as the closer connection exception. 

Automatically Assessed Penalties are Common

If the taxpayer does not file Form 3520 timely, they may receive an automatically assessed penalty (CP15 Notice) To protest the Form 3520 penalty, the taxpayer has a limited time to respond — so it is important to take note of the date of the notice.

Taxpayers Can Challenge the Form 3520 Penalty

A Taxpayer may avoid being assessed a Form 3520 penalty and/or challenge and abate the penalty if the penalty has already been assessed. If the penalty has not been assessed yet, the Taxpayer may qualify for one of the offshore tax amnesty programs such as the Streamlined Procedures or Delinquency Procedures. Likewise, the Taxpayer may also be able to fight or abate a Form 3520 penalty by showing they acted with reasonable cause and not willful neglect. Taxpayers can pursue several avenues to fight Form 3520 penalties, such as filing a Protest Letter, IRS Appeal, Collection Due Process Hearing, Tax Court Petition, or litigating the matter in Federal Court.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520 and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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