Reporting foreign gifts and trusts can seem complicated for taxpayers.
However, by understanding the key requirements around Form 3520, you can properly report foreign transactions and avoid penalties.
In this post, we'll walk through who needs to file Form 3520, what transactions must be reported, how to fill out the form, when and where to file it, and how to correct any mistakes.
Introduction to Form 3520 for Reporting Foreign Trust Transactions and Gifts
Form 3520 is an information return that must be filed by U.S. persons to report transactions with foreign trusts and receipt of foreign gifts. The purpose of the form is to increase transparency around foreign trusts and offshore activities.
Understanding the Purpose of Form 3520
Form 3520 must be filed by U.S. persons who:
- Create or transfer money or property to a foreign trust
- Receive distributions from a foreign trust, directly or indirectly
- Receive gifts or bequests from foreign entities or persons exceeding reporting thresholds
By requiring disclosure of these transactions, Form 3520 enables the IRS to verify that proper taxes are being paid on foreign funds and assets. It also helps detect abusive tax schemes involving offshore vehicles.
Form 3520 Filing Requirements
The following types of transactions typically trigger the Form 3520 filing requirement if they exceed reporting thresholds:
- Creating or funding a foreign trust
- Making transfers to a foreign trust, including loans
- Receiving distributions of money or property from a foreign trust
- Receiving foreign gifts or inheritances over $100,000 from nonresident aliens or foreign estates
There are penalties for failure to file Form 3520, with exceptions in some cases for reasonable cause.
Consequences of Non-Compliance
Failure to file Form 3520 can result in the following:
- A penalty equal to 35% of the gross reportable amount not reported
- An additional $10,000 penalty upon notice from the IRS requesting the form
- Criminal penalties for fraudulent non-filing
However, penalties may be abated if the taxpayer can demonstrate reasonable cause and good faith in failing to file.
Form 3520 Penalty Abatement
To qualify for a penalty abatement, the taxpayer generally must:
- Not have been penalized before
- File Form 3520 upon realizing the requirement
- Show reasonable cause for previous failure to file
Reasonable cause may exist due to events like destruction of records or death in the family. Each case is determined based on its facts and circumstances.
How do I report a foreign gift?
Gather the necessary information to complete Form 3520– you will need to provide the name and address of the donor, the date the gift was received, a description of the gift, and its value.
The key details to report include:
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Name and address of the donor: Provide the full legal name and physical mailing address of the person or entity that made the gift.
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Date the gift was received: Report the date you took possession or legal ownership of the gift.
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Description of the gift: Describe in detail what was gifted - this could include property, cash, investments, etc.
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Value of the gift: Determine the fair market value in US dollars of the gift on the date it was received. Support your valuation with appraisals, financial statements or other reasonable documentation.
The deadline to file Form 3520 to report a foreign gift is April 15th of the year following when the gift was received. For example, gifts received in 2023 must be reported by April 15th, 2024.
Failure to file Form 3520 can result in steep penalties starting at 5% of the gift's value per month up to a maximum of 25%. Reasonable cause for late filing can sometimes justify a penalty waiver.
Attach Form 3520 to your annual individual tax return. Send the completed forms to the IRS address provided in the instructions. You may also need to separately file Form 3520-A for the foreign trust, if applicable.
Do I need to report foreign inheritance or gifts?
If you receive a gift or inheritance valued at more than $100,000 from a non-US person (or their estate), you will need to file IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts at the same time as your individual income tax return.
Here are some key points about reporting foreign gifts on Form 3520:
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The $100,000 threshold applies on a per-giftor basis. So if you receive gifts from multiple foreign persons that are each valued under $100,000 but total more than $100,000 combined, you still need to file Form 3520.
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Form 3520 must be filed by the U.S. person receiving the gift or inheritance. So if your spouse receives a foreign gift over the threshold, they would be responsible for filing Form 3520, not you.
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Gifts subject to Form 3520 reporting include cash, real estate, stocks, artwork, jewelry, vehicles, and more. Even forgiveness of a debt can count.
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There are some exceptions - for example, if you received the gift from your foreign spouse while you were married, or if the gift was intended for tuition or medical expenses. But other gifts still need to be reported.
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Failure to file Form 3520 when required can lead to steep penalties starting at 35% of the gift or inheritance amount. The penalties can be waived if you can demonstrate reasonable cause.
So it's important to track any sizeable gifts or inheritances you receive from non-US persons. Consult with a tax professional to determine if you meet the Form 3520 filing requirements in any given tax year. Keeping on top of foreign gift reporting can help avoid penalties down the road.
What is the foreign gift limit for Form 3520?
You are only required to file Form 3520 if you received:
- A gift over $100,000 from a foreign person or estate
- A gift over $15,601 from a foreign partnership or corporation
The IRS requires U.S. citizens and residents to report foreign gifts that exceed these thresholds on Form 3520. This reporting ensures gifts from foreign entities are properly taxed.
Some key points on foreign gift limits for Form 3520:
- The $100,000 limit applies to gifts from nonresident alien individuals or foreign estates
- The $15,601 limit applies to gifts from foreign corporations or foreign partnerships
- These limits apply on a per-gift basis - multiple smaller gifts may still trigger filing requirements
- The limits apply to the total value of cash and other property received
- There are few exceptions - even exempt gifts likely still need reporting
Failure to file Form 3520 can lead to steep penalties starting at 5% per month of the gift's value. Work with a tax professional to understand your filing responsibilities if you receive any sizable gifts from foreign individuals, estates, corporations or partnerships.
Are gifts from foreign relatives taxable?
Form 3520 is not a tax form. There are no specific IRS taxes on gifts received from a foreign person. In other words, if a U.S. person receives a gift from a foreign person, that specific transaction is not taxable.
However, gifts from foreign trusts or foreign estates may still need to be reported on Form 3520. Here are some key points about taxability of foreign gifts:
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Gifts from a foreign individual are not taxable to the recipient. But gifts exceeding $100,000 from a nonresident alien or foreign estate may need to be reported on Form 3520.
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Distributions from foreign trusts are not necessarily gifts. They may be taxable events depending on the trust's status. Taxable distributions over $100,000 require filing Form 3520.
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If a U.S. person creates or transfers property to a foreign trust, it can trigger gift/estate tax and Form 3520 filing requirements. There are exceptions for transfers under $100,000.
So in summary, gifts from foreign individuals are not taxed. But gifts and distributions connected to foreign trusts or estates may still trigger reporting rules and possible tax obligations. The key factor is whether the gift involves a foreign trust.
Consult a tax professional to determine if transactions with foreign trusts require filing Form 3520. The rules are complex, but the form helps the IRS track transfers and enforce tax laws on foreign trusts.
Who Must File Form 3520
U.S. Owner of a Foreign Trust
A U.S. person who directly or indirectly transfers property to a foreign trust is generally considered the owner of that portion of the trust under the grantor trust rules. As such, they must file Form 3520 if:
- They transferred property to a foreign trust (this includes money or other assets)
- The fair market value of assets transferred exceeded $100,000 in a year
- The trust has a U.S. beneficiary
Exceptions may apply in certain situations - consult a tax professional to determine if you meet the filing requirements.
U.S. Beneficiary of a Foreign Trust
A U.S. person must file Form 3520 if:
- They received a distribution from a foreign trust, directly or indirectly
- They know they have an absolute right to future distributions of income or corpus from a foreign trust
- The total distributions received exceed $100,000 during the tax year
Note that loans of cash or marketable securities generally also count as distributions.
U.S. Person Reporting Gratuitous Transfers
A U.S. person who receives a gift or bequest valued above $100,000 (at the time of transfer) from a nonresident alien or foreign estate must file Form 3520. This includes:
- Cash transfers
- Tangible property transfers
- Real estate transfers
- Stock certificate transfers
You must also file Form 3520 to report gifts above the annual exclusion amount to a U.S. person from certain foreign corporations or foreign partnerships.
Exceptions to Filing Form 3520
There are some scenarios where a U.S. person with connections to a foreign trust may not need to file Form 3520:
- If you transferred property worth $15,000 or less during the year, and meet certain other requirements
- If you had only an indirect transfer through certain pass-through entities like partnerships
- If you received a distribution or gift not exceeding $16,075 for the tax year
Consult with a tax professional to clarify if any exceptions apply to your situation before deciding not to file. The penalties for non-compliance can be severe.
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Understanding the Form 3520 Instructions
Form 3520 is used to report transactions with foreign trusts and receipt of certain foreign gifts. Proper filing is important to avoid potential penalties. This section provides key guidance on completing the form accurately.
Identifying Reportable Events
The following events trigger the need to file Form 3520:
- Creation of a foreign trust by a U.S. person
- Transfers of money or property to a foreign trust, including gifts and bequests over $100,000 from foreign persons
- Receipt of distributions from a foreign trust
- Receipt of gifts or bequests over $16,812 (2022) from foreign corporations or partnerships
Exceptions may apply in certain cases, such as transfers to charitable trusts. Consult the form instructions for reporting thresholds and exclusions.
Distinguishing Between Foreign Trust and Domestic Trust
A foreign trust has:
- A non-U.S. grantor
- Any trustees not subject to U.S. court jurisdiction
- No requirement to distribute income currently
Trusts not meeting these criteria are domestic. The location of trust assets or administration does not determine foreign or domestic status.
Clarifying Grantor Trust and Nongrantor Trust Status
For U.S. tax purposes:
- Grantor trusts: The grantor retains control over trust assets or income. No separate taxable entity exists.
- Nongrantor trusts: The grantor relinquishes control. These are separate taxable entities.
Grantor trust status determines whose TIN to provide on Form 3520 and who reports trust transactions.
Calculating the Gross Reportable Amount
This is the total value of property transferred to a foreign trust, without reduction for liabilities or encumbrances. For gifts and bequests received, it is the fair market value. Accurate valuation is essential to avoid underreporting penalties.
Thoroughly review the instructions to properly complete all applicable sections of Form 3520 based on your specific circumstances. Correct filing reduces audit risk and potential penalties.
When and Where To File Form 3520
This section covers the filing deadlines for Form 3520 based on different reportable events with a foreign trust, and the appropriate submission locations.
Ongoing Foreign Trust Transactions
For transactions between a U.S. person and an ongoing foreign trust, Form 3520 is due on the date that person's tax return is due, including extensions. This means it should be filed along with your annual income tax return.
If you need an extension for your income tax return, you can also get an extension for Form 3520 by filing Form 7004. This will give you an additional 6 months to file the form.
Creation of or Transfer to a Foreign Trust
For the creation of a foreign trust, or transfer of money or assets to one, Form 3520 is due 90 days after that event.
For example, if you create a foreign trust or transfer assets to one on June 1st, you must file Form 3520 by August 30th of that same year.
The form should be mailed to the address listed in the instructions. Send it certified mail with return receipt requested to have proof it was delivered.
Does Form 3520 Need to Be Attached to 1040
No, Form 3520 does not need to be physically attached to your Form 1040 income tax return. However, it does need to be filed by the due date for your tax return (including extensions).
You should include a statement with your 1040 noting that Form 3520 is being filed separately. List the date it was or will be filed.
IRS.gov/Form3520: Accessing Forms and Instructions
To get the latest version of Form 3520, visit IRS.gov/Form3520. This page also has the instructions which explain requirements for filling it out properly.
You can download, fill out, print and mail the form from here. All the information you need is on this page.
Be sure to use the current year's version of the form to avoid any potential processing delays or issues. The site is updated annually.
Penalties for Not Filing Form 3520
Failing to properly file Form 3520 can result in severe civil and criminal penalties imposed by the IRS. The penalties depend on the specifics of the noncompliance and can range from monetary fines to imprisonment.
Civil Penalties Under Section 6677
The most common penalties for not filing Form 3520 are:
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5% of the gross value of any foreign trust assets that should have been reported each month for which the failure continues. This penalty cannot exceed 25% of the gross reportable amount.
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35% of the gross value of any foreign trust assets that should have been reported if the failure to file was due to intentional disregard.
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Minimum penalty of $10,000 for failure to report creation of or transfer to a foreign trust.
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5% of the gross value of foreign gifts received for each month failure to report continues (max 25%).
These penalties may be waived if the taxpayer can demonstrate reasonable cause for failure to file. The IRS will evaluate each case based on the specific facts and circumstances.
Criminal Penalties and Section 6662(j) Accuracy-Related Penalties
More severe penalties can apply in cases of tax evasion involving foreign trusts:
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Up to 5 years in prison and substantial monetary fines for willful attempts to evade tax payment.
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An accuracy-related penalty of 20% of any underpaid tax under Section 6662(j) may apply to failures related to foreign trusts.
These criminal charges require proof the violations were willful and intentional efforts to conceal taxable assets or income.
Reasonable Cause and Penalty Abatement
To have late filing penalties waived, the taxpayer must demonstrate that failure to properly file Form 3520 was due to reasonable cause, not willful neglect. Circumstances that may qualify include:
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Unavoidable delays in obtaining trust records from foreign sources.
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Incapacitating illness or death of the taxpayer or an immediate family member.
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Erroneous or incomplete advice from a tax advisor upon whom the taxpayer reasonably relied.
If reasonable cause is established, taxpayers may file Form 843 to request an abatement of penalties for late filing or incomplete reporting related to Form 3520. Supporting documentation should be included to avoid delays or rejection.
How To File Form 3520
Gather Necessary Information
To file Form 3520 accurately, you first need to gather key details on any reportable events involving foreign trusts that occurred during the tax year. This includes:
- The creation of a foreign trust, transfer of money or assets to or from a foreign trust, receipt of distributions from a foreign trust, etc.
- The names, addresses, and taxpayer identification numbers (TINs) of the U.S. owners and beneficiaries of foreign trusts.
- The names, addresses, and TINs of any U.S. transferors who transferred assets to or from foreign trusts.
- Details on any reportable events such as the transfer of property, money, or services to a foreign trust exceeding $100,000 during the tax year.
Having this information handy will help you properly complete Form 3520.
Fill Out Form 3520
With your documentation ready, you can start filling out Form 3520. Key parts to complete include:
- Part I for reporting information on foreign trusts, U.S. beneficiaries, U.S. owners, etc.
- Part II for reporting information on U.S. persons who transferred property or money to a foreign trust.
- Part III for miscellaneous information.
- Schedule A-D as required for providing additional details on foreign trust transactions, related entities, etc.
Fill out all relevant sections accurately and completely. Doing so properly discloses all reportable events and transactions to avoid penalties. Attach any additional statements if needed.
Submit Alongside Tax Return
In most cases, you must attach Form 3520 to your annual Form 1040 tax return and file both by the tax filing deadline, including extensions. An exception is if you don't have to file an income tax return. In that case, just send in Form 3520 separately to the address in the instructions.
To avoid late filing or failure to file penalties under Section 6677, submit Form 3520 on time every year there is a reportable event involving a foreign trust.
Applying for an EIN for Foreign Trusts
If you are the trustee of a foreign trust, you may need to get an Employer Identification Number (EIN) if the trust has any U.S. owners or beneficiaries. To apply:
- Use Form SS-4 to request an EIN for a foreign trust. Select "foreign trust" as the type of entity.
- Enter the trust's foreign address on Form SS-4. You can also enter a U.S. mailing address if applicable.
- Submit Form SS-4 by fax or mail to the address provided in the instructions.
The IRS will issue an EIN for the foreign trust, which you'll use for tax reporting on Form 3520 and other purposes requiring trust identification.
Correcting Mistakes and Errors on Filed Form 3520
For any errors discovered after filing Form 3520, use Form 8082 to notify the IRS and correct inaccurate or incomplete information previously reported.
Filing an Amended Form 3520
If you discover an error after filing Form 3520, you can file an amended return to correct the mistake. Follow these steps:
- Obtain a copy of the instructions for Form 3520 and the version of the form that you originally filed
- Carefully go through your original Form 3520 and find all errors or omissions
- Make the necessary corrections on the Form 3520 using the instructions
- Write "Amended" clearly at the top of the corrected Form 3520
- Complete and attach Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, to explain the changes
- File the amended Form 3520 and Form 8082 with the IRS service center where you originally filed
Be sure to keep a copy for your records. Amending Form 3520 does not relieve you of any interest or penalties associated with the original incorrect filing.
Inconsistent Treatment of Items
If you file an amended Form 3520 that is inconsistent with other tax forms, attach Form 8082. On Form 8082, identify the inconsistent treatment and explain the reason for it. This can help avoid triggering an audit.
For example, if you amend Form 3520 to include a foreign gift that was omitted, also amend Form 3520 and any other forms impacted, like Form 1040. Explain the reason for adding the previously unreported gift on Form 8082.
Continuous-use Form and Instructions for Revisions
The IRS provides a continuous-use Form 3520 and instructions that have all form revisions consolidated into one document. Obtain the continuous-use Form 3520 to ensure you use the correct version when amending.
Refer to the current instructions each time you amend to ensure proper completion. The instructions provide revision information, including which line items changed between versions. Using the wrong form version or instructions can lead to additional errors.
Carefully review amended forms prior to submission. Consider enlisting a tax professional for assistance to avoid further mistakes. Maintaining proper documentation and acting promptly upon discovering errors can help demonstrate reasonable cause to the IRS and potentially minimize penalties.
Conclusion
Properly filing Form 3520 to report foreign trust transactions and gifts is critical for U.S. taxpayers to avoid severe civil penalties and potential criminal prosecution. Using the information in this guide can help ensure full compliance.
Summary of Key Points
Here are some key points to remember about filing Form 3520:
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Form 3520 must be filed by U.S. persons who are considered owners or beneficiaries of foreign trusts or who receive foreign gifts over a certain amount.
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There are strict deadlines for filing Form 3520 - it is generally due on the same date as your annual tax return including extensions.
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Failure to file Form 3520 can result in substantial penalties starting at 5% of the gross reportable amount up to 35% in extreme cases.
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Reasonable cause may allow penalty abatement but the taxpayer bears the burden of proof. Maintain careful documentation.
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Attach Form 3520 to your annual tax return and file any delinquent forms as soon as possible. Consider using a tax professional for guidance.
Final Thoughts on Compliance and Reporting
Meeting your foreign trust and gift reporting obligations is critical not only to avoid penalties but also out of civic responsibility. By complying with IRS regulations, you contribute to an equitable tax system that funds essential public services we all depend on. If in doubt, seek assistance from a qualified tax professional to ensure full and accurate compliance. The potential consequences of noncompliance are simply too severe to ignore Form 3520 filing requirements.
