How the IRS Scrutinizes Form 3520 Part IV (Gift & Inheritance)

How the IRS Scrutinizes Form 3520 Part IV (Gifts and Inheritance)

How the IRS Scrutinizes Form 3520 Part IV (Gifts and Inheritance)

In recent years, the Internal Revenue Service has increased scrutiny of taxpayers with a Form 3520 filing requirement to disclose the receipt of a foreign gift, trust distribution, or inheritance. Even though U.S. taxpayers who receive foreign gifts or inheritances are not required to report them as income, the individual must still disclose the information on Form 3520. And while from a technical standpoint, the reporting of a foreign gift or inheritance is relatively straightforward. Still, the IRS scrutinizes taxpayers who are filing this form and so taxpayers with a Form 3520 requirement to report foreign gifts or inheritances should be aware of these common triggers.

Part IV Form 3520 (What is Required)

Part IV of Form 3520 refers to U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons. The extent of how much a taxpayer has to disclose about a foreign gift or inheritance is dependent on who made the gift or inheritance. If it was from an individual, then the taxpayer simply has to report the date of the gift/inheritance, the amount of the gift/inheritance — and what the gift/inheritance consisted of. However, if the taxpayer received a gift from a foreign entity, then the taxpayer is required to disclose more information, such as the name of the entity that issued the gift,  the entity’s address, and TIN, if applicable.

Timeliness is Key

The main way taxpayers get into trouble with Form 3520 filings is that they do not file the form in a timely manner. It is important to note that the form is due April 15th, along with the individual’s tax filing. If the taxpayer is on an extension for filing their tax return, then the Form 3520 goes on extension as well. But since the IRS is very understaffed and disorganized — and the Form 3520 goes to a separate location in Ogden, UT (even if the tax return is filed in a different location) — taxpayers should try to get the form submitted by April 15th when possible, even if they were going to file an extension for their tax return.

Meeting the Form 3520 Threshold

It is also important for taxpayers to note that the gift threshold is not based on the individual gift, but it is based on the total value of gifts received in the year from that person or related persons.

Here is an example:

• • • Adam is a U.S. person who received a gift of $600,000 from his foreign mother. He is required to file form 3520, Part IV.

    • Andrea is a U.S. person who received seven (7) gifts of $50,000 from her foreign grandma. Andrea is also required to file form 3520, Part IV.

    • Alan is a U.S. person who received $50,000 from his foreign mother and $90,000 from his foreign father (they are still married). Since he received more than $100,000 in total from related parties, he is required to file the Form 3520.

    • Amanda is a U.S. person who received a gift of $60,000 in the prior year from her foreign grandma and then a gift of $50,000 from her grandma in the current year. Since she did not receive more than $100,000 in the same year she may not have to file form 3520.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR 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 misses 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

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.