Form 3520 Beginner’s Guide with Common Filing Examples

IRS Form 3520 Beginner’s Guide: Foreign Gifts, Trusts & Inheritances

IRS Form 3520 Beginner’s Guide: Foreign Gifts, Trusts & Inheritances

In recent years, the IRS has significantly increased enforcement of Form 3520 and Form 3520-A compliance for reporting foreign gifts, trusts, and inheritances. U.S. Taxpayers who meet the threshold requirements for filing this international information reporting form should be sure to file the form timely to avoid being assessed harsh fines and penalties by the IRS. While in years past the Internal Revenue Service automatically assessed penalties against Taxpayers who failed to file the form timely, in October 2024 the IRS commissioner stated that the IRS will stop issuing automatic penalties for non-compliance — and will consider whether the Taxpayer has ‘reasonable cause’ before assessing penalties.

The Purpose of Form 3520

Many different circumstances may require the filing of Form 3520 and Form 3520-A. One of the most common situations is when a U.S. person receives a gift or inheritance from a Non-Resident Alien. Other common situations include reporting the ownership of a foreign trust or receipt of foreign trust distributions. Taxpayers who filed late Form 3520 or 3520-A and have been penalized by the IRS may qualify for a penalty abatement if they can show reasonable cause and/or submit to one of the offshore disclosure programs. Let’s walk through some common examples of who must file Form 3520 and 3520-A.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Form 3520 Foreign Gift

One of the most common scenarios involves when a U.S. person receives a gift from a non-resident alien (NRA) that exceeds the threshold for filing:

• • • Example: Dana is a U.S. Citizen but the rest of her family are non-resident aliens who live abroad. Her aunt is very proud that Dana graduated college and gifted her $400,000 to help her purchase a new home. Dana may have to file Form 3520.

    • Example: Devin is a Lawful Permanent Resident who currently attends school in the United States. Devin’s grandma is a non-resident alien who wants to help Devin with expenses — and gifted him $200,000 to help him supplement his expenses. Even if Devin does not use all the money for expenses, his grandma made it clear that the full amount is a gift to Devin. Devin may have to file Form 3520.

    • Example: Denise’s mom is a non-resident alien who wants to gift Denise and her sister each 15% in a foreign business. The value of the shares that Denise receives are $500,000. Even though Denise did not receive money, and the business is located outside of the United States, she may have to file Form 3520.

    • Example: Daniel is a visa holder who meets the substantial presence test. His dad gifted him a foreign rental property worth $600,000 so that Daniel can both own the property and collect any rents that are paid. Even though the rental property is located outside of the United States, Daniel still received a gift from a non-resident alien and may have to file Form 3520.

Form 3520 Foreign Inheritance

For purposes of Form 3520, the IRS takes the position that an inheritance is a type of gift and therefore if the Taxpayer receives an inheritance from a non-resident alien, it is reportable on Form 3520.

• • • Example: Brenda is a Lawful Permanent Resident who lives in the United States and recently received a $600,000 inheritance from her foreign mother who passed away. The inheritance is comprised of foreign property and assets and have not been transferred to the U.S. Even though no money or assets have been transferred to the United States, Brenda may still have to file Form 3520.

    • Example: Bill is a U.S. Citizen who received a $3,000,000 inheritance when his foreign father passed away. While it is a large sum of money and Bill is not required to pay any taxes on the inheritance, he may have to file Form 3520.

    • Example:  Belinda is a Lawful Permanent Resident who has several family members living overseas. Her mother also a Lawful Permanent Resident who lives in a foreign country. Belinda’s mom recently passed away and left Belinda $1,000,000. Even though Belinda’s mom lives outside of the United States, because she is a ‘U.S. person for tax purposes,’ Belinda is not required to file a Form 3520 when receiving this inheritance.

Form 3520 Trust Distribution

When a person receives a trust distribution from a foreign trust, the U.S. beneficiary is required to report the distribution on Form 3520 — but the tax implications of the distributions will vary depending on the type of foreign trust.

• • • Example: Steven is a U.S. Person who is a beneficiary of a foreign non-grantor trust. He received a $70,000 distribution in the current year from the foreign trust and is therefore required to file a Form 3520 — as well as include the trust distribution as income.

    • Example: Sam is a U.S. Person who is a beneficiary of a foreign grantor trust. Sam also received a $70,000 distribution in the current year from the foreign trust. Even though Sam is required to report the trust distribution on Form 3520, generally it is the grantor of a grantor trust who is required to pay tax on the income and not the beneficiary. (If the grantor of the foreign trust is a U.S. person and/or the trust contains both U.S. and foreign assets, it can further complicate the reporting).

Form 3520/3520-A Ownership of Foreign Trust

When a Taxpayer has ownership of a foreign trust, they may be required to file form 3520 and form 3520-A. The reporting requirements for ownership of a foreign trust are typically more complicated than when a taxpayer files a Form 3520 to report the receipt of a gift or distribution.

• • • Example: Denise is a U.S. Citizen who has non-resident alien family members living abroad. Her sisters — who are all non-resident aliens– decided to form a foreign trust and wanted to include Denise as one of the owners. Now that Denise is an owner of the foreign trust, she is required to report her ownership on form 3520 and 3520-A.

    • Example: Daniel is a Lawful Permanent Resident who recently became a U.S. person in the current year. Now that Daniel is a Lawful Permanent Resident and a U.S. person for tax purposes, his ownership in his foreign trust is now reportable on Form 3520 and 3520-A (U.S. owner of a foreign trust). In other words, even though the only action Daniel took was to become a U.S. person, his previous ownership in a foreign trust that he owned before becoming US person is now reportable.

Related Persons

An important rule to remember is that when Taxpayers receive a gift from foreign persons and those persons are related, then all of the gifts from related persons are aggregated together to determine whether the threshold requirements are met. This is to prevent taxpayers from ‘gift splitting’ to avoid reporting when the gifts are coming from the same related person. It is also important to note that related parties can include individuals or entities.

Trust Reporting Exceptions (2020-17 and Proposed Regulations)

For some Taxpayers who have a foreign trust that qualifies as a tax-deferred retirement or non-retirement savings plan, they may be able to avoid reporting if they qualify for the exception under Revenue Procedure 2020-17 (and the recently proposed foreign trust regulations). Not all foreign savings plans will qualify, so it is important that Taxpayers carefully evaluate the different requirements to see if the type of tax-deferred savings accounts they have is eligible for the exception.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of Form 3520/3520-A. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

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 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

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

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