Form 3520 is generally used by a U.S. person to annually report: (1) the receipt of gifts or bequests from a non-US person; (2) transfers by U.S. persons to foreign trusts; (3) foreign trust distributions to U.S. beneficiaries; and (4) annual filings by foreign trusts’ U.S. owners. Many U.S. persons may not be aware of their requirement to file a Form 3520, because in certain circumstances the transactions do not generate an income tax liability. Regardless, the IRS is aggressively enforcing compliance with foreign gift reporting, and Form 3520 filing requirements in general.
You might be unsure whether you are required to file a Form 3520 in the current year, or you might be unsure how to properly report a delinquent Form 3520 for a gift from a previous year. Below is a summary of important information about how to report foreign gifts and how to mitigate or resolve penalties from failing to report a foreign gift from a previous year.
A foreign gift is any amount received from a foreign person that the recipient treats as a gift and excludes from gross income. Foreign gifts exclude amounts paid for qualified tuition or medical payments and distributions which are properly disclosed to a foreign trust’s U.S. beneficiary under IRC §6048(c).
A “foreign person” includes a:
When determining the reporting thresholds, you must aggregate gifts received from related parties. A person is related to another person if the relationship between them would result in a disallowance of losses under IRC §267(b).
For gifts from a nonresident alien individual or foreign estate, you are required to report the gift when the gifts collectively exceed $100,000 during the taxable year. Further, if the gifts exceed $100,000, you must individually identify each gift in excess of $5,000.
For gifts from foreign corporations or foreign partnerships, you are required to report the gifts if the gifts from all entities collectively exceed $16,815 for 2021. You must individually identify each gift and the identity of the donor.
Form 3520 is filed separately from your income tax return to the Internal Revenue Service Center in Ogden, UT. Generally, the due date for a U.S. person to file a Form 3520 is April 15th. The due date for a U.S. citizen or resident who lives outside the United States and Puerto Rico, or an individual in the military or naval service on duty outside the United States and Puerto Rico, is June 15th. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year.
Besides other penalties for Form 3520 filing deficiencies, if Part IV of Form 3520 (which is where you should report a foreign gift or bequest) is filed late, incomplete, or incorrectly, you may receive a penalty equal to five percent of the value of the gift/bequest for each month the gift is not reported—not exceeding 25 percent of the gift. In limited cases, the IRS will waive the penalty if you show that you have reasonable cause for the failure to timely or accurately file.
You can expect that getting back into compliance with delinquent international information reports, such as Form 3520, will be complicated and best achieved with a qualified professional’s assistance—especially in light of recent IRS changes to the Delinquent International Information Return Submission Procedures in late 2020.
Prior to those changes, taxpayers who had reasonable cause for their late-filed international information reports did not anticipate being automatically subject to penalties for their delinquent filing. However, the IRS has recently been issuing automatic assessments of penalties where it has discovered Form 3520 non-compliance. In November of 2020, the IRS went a step further and openly modified its procedure, providing now that “penalties may be assessed without considering the attached reasonable cause statement.”
As a result, taxpayers are increasingly receiving significant penalty notices and incurring legal and professional fees to pursue appeals and other courses of remediation, which can be costly and time-consuming. Given the IRS’s more aggressive approach now, we can’t over-emphasize how important it is for you to address this issue as early as possible—finding the best overall course of action, getting compliant quickly, and mitigating costs involved. At Frost Law, we have the experience and resources to help you navigate these complex compliance considerations.