IRS Form 3520: Tax Guide to Foreign Gifts, Trusts, and Inheritance

IRS Form 3520: Tax Guide to Foreign Gifts, Trusts, and Inheritance


Taking on the Internal Revenue Service (IRS) is never a small task. In recent years, the IRS has cracked down on those who fail to report foreign income or overseas gifts. This aggressive shift towards foreign accounts compliance can present issues for individuals and multinational corporations alike. If you are a U.S. person who received a gift or distribution from a foreign trust, or if you have received an overseas inheritance, you may need to complete and submit IRS Form 3520 to stay in the good graces of the IRS.

However, if you fail to file this form or incorrectly complete it, you could face severe penalties and fines. A seasoned tax attorney can guide you through the foreign income reporting process or develop an abatement strategy to lessen or remove the penalties and fines imposed against you. This blog provides an in-depth examination of the Form 3520 filing requirements and penalty abatement policies.

What Does IRS Form 3520 Do?

According to the Internal Revenue Service, if a U.S. person directly or indirectly receives a gift or distribution from a foreign trust, that person is required to use Form 3520 to report the receipt of these overseas funds. Furthermore, if a U.S. person receives a gift or inheritance worth more than $100,000, they would need to report such gifts with Form 3520. It is important to note that the U.S. person qualification does not solely apply to American citizens. In fact, the following are considered U.S. persons for taxation purposes:

  • A citizen born in the United States, or a citizen born outside of the United States who has at least one parent who is an American citizen;
  • A naturalized citizen;
  • A United States resident who meets the green card or substantial presence test requirements for the calendar year; or
  • Any other person who is not considered a foreign person.

The U.S. persons classifications are complicated. Thankfully, you do not have to navigate this complex system on your own. The experienced tax attorneys at Abajian Law are standing by to review your unique circumstances and offer targeted legal advice. Our legal team can ensure your compliance with the IRS’ foreign reporting laws so you can avoid steep fines and penalties.

Do I Have to File 3520?

It can be difficult to determine who should file Form 3520. Oftentimes, unreported foreign gift situations involve a U.S. person who receives an inheritance from a foreign relative or trust distribution. In these instances, the foreign gift recipient is typically unaware that they are expected to report this information to the IRS. The following situations would trigger the need to file Form 3520:

  • Qualified Obligation: If you are the responsible party who oversees and reports on the events of a foreign trust, or if you hold any of the obligations listed on pages three or four the Form 3520 Instructions, you will be required to fill out the form;
  • Owner of Trust: If you are the owner of a foreign trust, even if you own only a portion, you will be required to submit Form 3520;
  • Trust Distribution Recipient: If you directly or indirectly receive trust distributions or hold qualified obligations with a related foreign trust, you must file Form 3520;
  • Gift Recipient from a Foreign Person or Estate: If you receive a gift or bequest from a foreign person or estate and it is valued at $100,000 or more, you are required to file IRS Form 3520; or
  • Gift Recipient from a Foreign Corporation or Trust: If you receive a gift or bequest from a foreign partnership valued at $11,273 or more, you will need to report this information on Form 3520.

If you are a U.S. person who meets any of the above criteria, you will need to complete Form 3520 and submit this information with your U.S. tax return. If you need to file Form 3520 on behalf of a deceased U.S. person, you will need to file both Form 3520 and Form 706.

Do I Need to Declare Inheritance from Overseas?

The IRS does not impose taxes on foreign gifts or inheritance if the recipient is a U.S. citizen or resident alien. However, if you receive an inheritance or gift from a foreign estate or non-resident alien, which exceeds a value of $100,000 (USD), then you must report this information to the IRS using Form 3520. So, if you are still wondering “do I pay taxes on money inherited from abroad?”, it may be time to contact a skilled tax attorney who can answer your questions and support you with the foreign income reporting process.

What Happens If You Forget to File Form 3520?

If you forget to file Form 3520 in a timely manner, you may face steep fines and penalties. If you incorrectly fill out the form or leave it incomplete, fines and penalties may apply in these instances too. There are several penalties and fines the IRS may impose against you:

3520 Penalties

  • The initial penalty is typically equal to or greater than $10,000 or 35% of the gross value of all property transferred to the trust which was not reported on Form 3520.
  • 35% of the gross value of all distributions received from a foreign trust which were not included on Form 3520.
  • 5% of the gross value of all trust assets owned by a U.S. person which were omitted from the return or incorrectly reported on Form 3520.

The IRS demands foreign asset reporting compliance, and they will go to great lengths to ensure these standards are upheld. These penalties are just the beginning of the punitive actions the IRS can take against you. Your continued noncompliance could result in steeper fines, harsher penalties, and a tedious and trying litigation process.

In addition, under IRC Section 6039F, failure to report a gift by a foreign person will result in a 5% penalty of the value of the total foreign gift for each month a failure to report continues (up to a max 25% penalty). For example, if a friend or family member from a foreign country who is a non-resident of the United States sent you, a United States resident, $1,000,000 as a gift in 2018, and you did not report the receipt of such gift on Form 3520 then you are subject to a $50,000 penalty every month you fail to report up to a max value of $250,000.

However, even the IRS understands that mistakes happen. Navigating the complex world of foreign income tax reporting is no small feat. Thankfully, there are penalty abatements in place to ensure you are treated fairly under the law and given the opportunity to rectify honest mistakes without the imposition of penalties or fines.

Form 3520 Penalty Abatement

A Form 3520 appeal and/or a reasonable cause statement could help a U.S. person reduce the fines or penalties associated with late reporting. There is no official form for a reasonable cause statement, so fighting IRS Form 3520 penalties requires a detailed approach and strong legal strategy. Because the review process for these statements is highly subjective, it is advised that you hire a knowledgeable tax attorney to help you draft a compelling reasonable cause statement.

It is important to note, there are a few circumstances that will invalidate a reasonable cause statement. First, instances in which the foreign country imposes penalties for disclosing receipt of foreign gifts or inheritance does not count as reasonable cause. Also, if a foreign fiduciary or trust provisions prohibit disclosure of the required information, the U.S. person would not be able to claim reasonable cause.

If, however, you can establish a reasonable cause exists, the next step is to notify the IRS in writing. Unfortunately, fighting the IRS on this issue can be a lengthy uphill battle. Long response times from the IRS combined with the department’s tendency to assess penalties before considering appeals can put well-meaning taxpayers in precarious situations.

In fact, wage levies may be imposed by the IRS before actually reviewing your appeal letter. Accordingly, it is in your best interest to be proactive during the appeals process. Although the waiting period can be a trying time for taxpayers, it is also an opportunity for the expert tax attorneys at Abajian Law to aggressively pursue all available litigation options on your behalf, including arguing your reasonable cause case effectively. . Sitting back and hoping that the IRS appeals process will simply work itself out can be a recipe for disaster. Securing the representation of Abajian Law to handle the matter can prove to be both prudent and advantageous simply based on our years of experience and past success.

What to Do If You Face Form 3520 Penalties

Reporting a gift or inheritance from a foreign person or entity can be a convoluted process with many loopholes which can ensnare taxpayers in a web of penalties and fines. These punishments can upend one’s life and have devastating financial effects. Since the penalties associated with Form 3520 are considered “assessable penalties” the IRS can assess and collect these penalties without giving an individual the opportunity to have their case reviewed under a prepayment forum (a forum where no prepayment of the disputed amount is required) like the United States Tax Court. In addition, since the IRS does not have to give an individual the opportunity to have their case reviewed, there is a great likelihood that the IRS will not abate or remove these penalties.

A rudimentary understanding of the rules and procedures regarding assessable penalties may cause a detrimental error to your case. Under IRC 6330, a Collection Due Process (“CDP”) challenge may be made for the underlying liability “if the person did not otherwise have an opportunity to dispute such tax liability.” A CDP hearing gives you the opportunity to dispute the amount you owed.

The rules however distinguish between assessable penalties and the penalties subject to deficiency procedures in determining whether an individual has had the “opportunity to dispute such tax liability.”Applying the rules incorrectly, or prematurely, may bar an individual from presenting a liability challenge in the United States Tax Court depending on if the opportunity is present at all. In other words, a CDP hearing will only be granted for assessment penalties and in turn an opportunity to challenge a penalty in the Tax Court, only if you did not have a prior opportunity to dispute such tax liability.Thus, you should consult a tax attorney when dealing with such matters as it requires a careful understanding of the rules.

Do Not Fight Form 3520 Penalties Alone

The Los Angeles tax attorneys at Abajian Law have the knowledge and determination you need to take on the IRS. The firm was founded by Vic Abajian, a former IRS senior trial attorney with vast foreign penalty experience. When it comes to navigating through foreign gifts, trusts, and inheritance reporting, your best defense is an effective offense. At Abajian Law, we have successfully resolved many complex tax law cases for our clients. Our dedicated legal team is standing by to answer your questions and provide the winning support your case deserves.

If you have questions about filing IRS Form 3520 or the penalty abatement process, contact our office today. The skilled tax attorneys at Abajian Law will ensure your interests are protected and your rights are upheld.

Call us today at 818-396-5059.

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