5 Key Facts About IRS Form 3520 All Tax Filers Should Know

5 Key Facts About IRS Form 3520 All Tax Filers Should Know

5 Facts About Form 3520

While there are many different types of international tax reporting forms that a U.S. person may have to file each year to disclose their foreign accounts, assets, investments, and income to the Internal Revenue Service — one of the most important tax forms to file is IRS Form 3520. Form 3520 is most commonly used by U.S. Persons to report large cash gifts they receive from foreign persons throughout the year.  But, Form 3520 is used to report more than just large foreign gifts. For example, when a U.S. person receives an inheritance from a foreign person — whether the money and assets are from the United States or abroad — they must also file a Form 3520. In addition, taxpayers who have ownership of a foreign trust are required to report Form 3520 just as individuals who are beneficiaries from a foreign trust and receive a distribution in the current year are also required to file the form. Finally, taxpayers who have certain transactions with foreign trusts may also be required to file the form in the year they have the transaction with the foreign trust.  It should also be noted, that there are various exceptions, exclusions, and limitations to having to file Form 3520 as well, including Revenue Procedure 2014-55, Revenue Procedures 2020-17, and the new Proposed Foreign Trust Regulations. 

*In 2024, we (Golding & Golding) updated our 5 Facts to Know about Form 3520 (originally published in 2019) and have also a video to assist you if you prefer an audio version of our updated summary.

More than $100K Gift includes Related Parties?

The main catalyst that requires taxpayers to file Form 3520 is then when they receive more than $100,000 from a non-resident alien (NRA) in a year from either one gift — or a series of gifts. It is important to note, that if the gifts come from related persons then those gifts are included as well to determine whether the $100,000 threshold is exceeded.

• • • “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.”

* If the gift is from a foreign entity then the threshold is significantly lower, hovers around $18,000, and adjusts for inflation.

Form 3520 is Not Limited to Just Cash Gifts

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

Did the Taxpayer Receive a Foreign Trust Distribution?

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 reportable on Form 3520.

Automatically Assessed Penalties are Common

If the taxpayer does not file Form 3520 timely, it is often the case that they will get hit with an automatically assessable penalty. The taxpayer will receive this penalty on an IRS 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 has various opportunities to try to avoid the penalty or possibly challenge and abate the penalty if the penalty has already been assessed. The taxpayer may be able to qualify under the Streamlined Procedures, Delinquency Procedures, or Reasonable Cause to avoid the penalty. Likewise, if the taxpayer has already been penalized, they may be able to fight or abate the penalty by showing they acted with reasonable cause and not willful neglect. Taxpayers may have to pursue several avenues such as a protest letter, appeal, and slash or collection due process hearing to successfully fight the penalty.

Late Filing Form 3520-A Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520-A and 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. 

Contact our firm today for assistance.