Form 3520: When a U.S. Person receives a gift from a foreign person, the IRS may require the U.S. person to file a Form 3520 to summarize the gift. There are certain threshold requirements that the gift(s) must meet before the U.S. Person is required to file the form. The threshold for reporting foreign gifts from individuals is significantly higher than the threshold from foreign entities. In addition, there are related party rules. The form 3520 is due to be filed at the same time a person files their tax return. If a person files an extension for their tax return, then the time to file the Form 3520 also goes on extension. The failure to properly report the form may result in 3520 penalties. This may also include the Taxpayer receiving a CP15 Notice — which has very strict response time limitations.
Let’s review Form 3520.
Who Files Form 3520?
Not everyone who receives a foreign gift, inheritance or trusts has to file the Form 3520.
As provided by the IRS, those required to file the form include:
U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:
- Certain transactions with foreign trusts.
- Ownership of foreign trusts under IRC sections 671 through 679.
- Receipt of certain large gifts or bequests from certain foreign persons.
Reporting Foreign Gifts & Inheritance on 3520
The reporting of a foreign gift or inheritance is usually one of the main catalysts for the necessity of filing form 3520.
It is important to note that the Form 3520 Instructions refer to both Gifts and Inheritances (an inheritance is also considered a gift). The form also includes instructions regarding the reporting of Foreign Trust Distributions.
Therefore, you may be required to file this form if you received either:
- A large gift
- A series of gifts from the same person
- A gift from a foreign business
- A foreign trust distribution
The form 3520 can be either relatively simple or more difficult depending on the nature of the gift or distribution you received.
Type of Foreign Gift
A gift is not limited to money. In other words, whether you received cash from overseas or other items that have cash value-you may be subject to reporting
Therefore, the first step is to evaluate the gifts you received from different foreign persons over the year and determine how much, in total, you received from individual.
Value of the Gift from Foreign Person
The next step is to determine what the value of the gift is. Typically, individuals can use any reasonable exchange rate that was published during the year.
Both the Internal Revenue Service and Department of Treasury sometimes publish different exchange rates. There is nothing wrong with picking one rate over the other if the rate is more beneficial to you during that year.
With that said, if you received different gifts from different countries, it may be in your best interest to use the same exchange rate source for each country location of the gift.
While this is not a hard and fast rule, maintaining consistency in reporting is one of the most important aspects of IRS reporting in order to try and avoid an unnecessary audit.
Who Gave You the Gift (aka the Source)?
The source of the gift will determine the proper reporting requirements.
Who is a Foreign Person?
For example, when you receive a gift from a foreign person, the threshold is more than $100,000.
In other words, if you received a single gift from an individual who is a foreign person and the gift amount was $99,000 USD, then you would not have to report to the gift.
Alternatively, if you received two gifts from the same person each valued at $55,000 USD, then you would have to report the total amount of $110,000 in foreign gifts.
Because even though each gift was under $100,000 the total value of the gift from the individual during the year is over $100,000.
Foreign Corporation of Foreign Partnership
The threshold requirements for having to file a gift if you receive it from a foreign corporation or foreign partnership is significantly lower than it is for a foreign person.
In fact, if you received foreign gifts from a foreign corporation or partnership that exceeds $16,388, then you are required to report.
*Unlike receiving a gift from a foreign person, in which you do not have to identify the name of the donor, if it is a foreign business then the IRS wants to know the name of the foreign business.
**Note: it may be beneficial for you if your foreign parents want to give you a gift but want to do it through the foreign corporation, to facilitate the gift from a foreign individual instead.
Because a $50,000 gift from a foreign person does not need to be reported on form 3520, whereas a foreign gift of $50,000 from a foreign partnership needs to be reported.
The IRS hates foreign trusts.
The IRS believes any foreign trust is only being used for offshore tax and money laundering purposes.
Depending on various factors such as whether the recipient is a beneficiary or trustee of the trust, along with other issues such as related trusts and trust transfers, the reporting on form 3520 involving foreign trusts is complicated – you may want to speak with an experienced offshore disclosure specialist law firm first.