Who Is Obligated to File Forms 3520 and 3520-A in 2023?

Who Has a Form 3520/3520-A Filing Obligation in 2023/2024

Who Has a Form 3520/3520-A Filing Obligation?

While there are many different types of international information reporting forms that US Persons may have to file to disclose their foreign accounts, assets, investments, and income to the IRS — Forms 3520 and 3520-A are two of the most common types of foreign tax forms for US Taxpayers. The IRS Forms 3520 and 3520-A are used by US Persons to report foreign gifts and foreign trusts to the Internal Revenue Service. The complexity of filing these forms varies based on whether the Taxpayer has to report a gift, a trust, or both. For example, while (timely) reporting a gift from a foreign individual is not very complicated — reporting the ownership of a foreign trust can be very complicated. Let’s look at six (6) examples of when a person may have the obligation to file a Form 3520 or 3520-A, what happens if it is filed late, and what Taxpayers can do to resolve late-filing penalties.

Gift from a Non-Resident Alien Individual

When a US person receives a gift from a non-resident alien individual and the value of that gift exceeds $100,000, then the US person may be required to file a form 3520 (This is one of the most common scenarios).

Inheritance from Non-Resident Alien Individual

In addition, if a US Person receives an inheritance from a non-resident alien that exceeds they are also required to file Form 3520 because, for IRS Form 3520 purposes, the U.S. Government takes the position that the inheritance is a type of gift.

Gift from a Foreign Entity

A U.S. Person also must report a gift that they receive from a foreign entity. And, unlike a gift from a foreign individual which has a relatively higher threshold (+$100,000), having to report a gift from a foreign entity has a much lower threshold. The most recent updated information regarding the threshold for foreign entity reporting can be found here. 

Gifts from Foreign Related Persons

It is important to note that the related party rules apply as well. For example, let’s say a US Taxpayer receives three gifts of $35,000 from each of three family members, in the same year, who are considered to be related parties. In this case, the total value of the gift would be $105,000 and this would exceed the $100,000 threshold– even though not one single individual issued a gift of over $100,000.

As provided by the IRS:

• • • “A related person generally includes any person who is related to you for purposes of sections 267 and 707(b). This includes, but is not limited to:

      • A member of your family—your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), lineal descendants (children, grandchildren, etc.), and the spouses of any of these persons; or •

      • A corporation in which you, directly or indirectly, own more than 50% in value of the outstanding stock. See section 643(i)(2)(B) and the regulations under sections 267 and 707(b).”

Foreign Trust Distributions

Unlike receiving gifts and foreign inheritances, when a U.S. Person receives a foreign trust distribution, they are required to disclose the foreign trust distribution on Form 3520 — and there is no minimum threshold for having to do so.

Ownership of a Foreign Trust

When a person has ownership of a foreign trust, it can become much more complicated from a reporting standpoint. That is because the Taxpayer then must file Form 3520-A, which can be a very complex form depending on the specific type of reporting and the type of foreign trust that they have. Sometimes, taxpayers may not even be able to obtain the necessary information for reporting (such as when it is a pension trust) — which is also why the IRS published Revenue Procedure 2020-17 that may eliminate reporting (and penalties) for certain late reporting of foreign trusts.

Form 3520/3520-A Penalties

The penalties for not properly reporting Form 3520 can be significantly high — and if more than five months have passed since the reporting was due then the IRS typically will assess a 25% penalty on the value of the gift or inheritance. In addition, the penalty for late foreign trust reporting varies depending on whether the taxpayer is the beneficiary or the owner of the foreign trust, noting that the case of Wilson (Second Circuit Court of Appeals) held that the Taxpayer could be subject to penalties as both the beneficiary and the owner for the same foreign trust.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR, Form 3520, Form 8938, 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 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 that 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. 

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.