Form 3520 Foreign Gifts, Inheritances & Trusts

Form 3520 is a U.S. international information return used to report certain foreign gifts and inheritances, transactions with foreign trusts, distributions from foreign trusts, and ownership of certain foreign trusts. A Form 3520 filing requirement can exist even when the underlying gift or inheritance is not taxable income.

This distinction is important because a taxpayer can owe little or no U.S. income tax from receiving money or property from abroad while still facing substantial penalties for failing to file Form 3520.

Colorado Legal assists taxpayers with Form 3520, foreign gifts and inheritances, foreign trust reporting, delinquent filings, reasonable-cause analysis, Streamlined submissions, and international information-return penalties. Philip M. Falco is both a Colorado attorney and Certified Public Accountant.

What Is Form 3520?

Form 3520 is formally titled Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

U.S. persons use the form to report several different categories of international transactions.

When Is Form 3520 Required?

Depending on the facts, Form 3520 can be required when a U.S. person:

• creates a foreign trust;
• transfers money or property to a foreign trust;
• makes certain loans to a foreign trust;
• is treated as an owner of a foreign trust under the U.S. grantor-trust rules;
• receives a distribution from a foreign trust;
• receives certain loans from a foreign trust;
• uses foreign trust property without paying fair market value;
• receives certain large gifts from foreign persons; or
• receives certain large foreign bequests or inheritances.

Foreign Gifts From Nonresident Aliens

A U.S. person generally must report in Part IV of Form 3520 when the person receives more than $100,000 during the tax year from a nonresident alien individual or foreign estate and treats the amounts as gifts or bequests.

The $100,000 test is an aggregate test.

Amounts received from multiple foreign persons may need to be aggregated when the recipient knows or has reason to know that the donors are related or that one person is acting as a nominee or intermediary for another.

Foreign Inheritances and Bequests

The same $100,000 reporting threshold generally applies to qualifying bequests received from foreign estates.

Receiving an inheritance from a foreign person does not, by itself, necessarily make the inheritance taxable income to the recipient.

However, reporting can still be required on Form 3520, and special rules can apply where the transfer involves:

• a foreign trust;
• a covered expatriate;
• a foreign corporation or partnership;
• foreign real property;
• foreign financial accounts;
• foreign securities;
• business interests; or
• other assets carrying separate U.S. reporting obligations.

Foreign Gifts From Corporations or Partnerships

Gifts from foreign corporations and foreign partnerships are subject to a separate, inflation-adjusted Section 6039F reporting threshold.

Unlike the $100,000 threshold for gifts and bequests from nonresident alien individuals and foreign estates, the corporate and partnership threshold changes periodically.

In addition, the IRS can potentially recharacterize purported gifts from foreign corporations or foreign partnerships under applicable tax rules.

A taxpayer receiving a significant transfer from a foreign business entity should therefore determine both whether Form 3520 reporting is required and whether the payment is properly characterized as a gift.

Does a Foreign Gift Create U.S. Income Tax?

A genuine gift from a foreign person ordinarily is not included in the recipient’s gross income merely because the donor is foreign.

But the label placed on a transfer by the parties does not necessarily control its U.S. tax characterization.

A payment described as a gift can potentially represent:

• compensation;
• a dividend;
• a corporate distribution;
• a partnership distribution;
• a trust distribution;
• a loan;
• repayment of a loan;
• sale proceeds;
• income; or
• another type of taxable or reportable transaction.

Form 3520 Part IV — Foreign Gifts and Bequests

Part IV of Form 3520 is used for qualifying foreign gifts and bequests.

The taxpayer may need to provide information concerning:

• the date of the gift or bequest;
• a description of the property received;
• the fair market value;
• the identity or type of foreign donor where required;
• related-donor aggregation; and
• whether another person acted as a nominee or intermediary.

Foreign Trust Transactions

Form 3520 also performs a very different function: reporting certain transactions and relationships with foreign trusts.

Foreign trust reporting can involve both income-tax consequences and information-reporting obligations.

A U.S. person can be required to report when the person:

• transfers assets to a foreign trust;
• is treated as an owner of a foreign trust;
• receives a distribution from a foreign trust;
• receives certain loans from a foreign trust;
• uses trust property without paying fair market value; or
• participates in other reportable foreign trust transactions.

Transfers to a Foreign Trust

A U.S. person who creates a foreign trust or makes certain transfers of money or property to a foreign trust can have a Form 3520 reporting obligation.

Transfers of appreciated property can also create substantive income-tax consequences under provisions governing transfers to foreign non-grantor trusts.

The reporting and tax consequences therefore should be evaluated separately.

Distributions From Foreign Trusts

A U.S. person receiving a distribution from a foreign trust can have Form 3520 reporting obligations regardless of whether the payment is called a gift.

Foreign trust distributions can include direct and constructive distributions.

Depending on the circumstances, reportable distributions can include:

• cash distributions;
• property distributions;
• trust-paid personal expenses;
• certain loans;
• use of trust property without adequate payment; and
• other direct or indirect benefits received from the trust.

Foreign Trust Loans

Certain loans of cash or marketable securities from a foreign trust to a U.S. person can be treated as trust distributions for reporting purposes.

Loans involving related persons and loans secured or guaranteed by foreign trusts can also require special analysis.

A transaction should not be assumed to avoid Form 3520 merely because documentation describes it as a loan rather than a distribution.

Use of Foreign Trust Property

A U.S. person who uses property owned by a foreign trust without paying fair market value within a reasonable period can potentially be treated as receiving a distribution.

This can become relevant with foreign trust-owned:

• homes;
• vacation property;
• vehicles;
• boats;
• aircraft; or
• other personal-use assets.

U.S. Owners of Foreign Trusts

U.S. persons treated as owners of foreign trusts under Sections 671 through 679 can have both Form 3520 and Form 3520-A responsibilities.

In general, a U.S. owner of a foreign trust is taxed on the portion of trust income attributable to the portion of the trust treated as owned by that person.

The U.S. owner generally must also ensure that the foreign trust satisfies applicable Form 3520-A reporting requirements.

Form 3520 vs. Form 3520-A

Form	General Purpose
Form 3520	Reports specified foreign gifts, bequests, foreign trust transactions, distributions, and U.S. ownership information
Form 3520-A	Annual information return for a foreign trust with a U.S. owner

A U.S. owner can have obligations involving both forms.

See our Form 3520-A Foreign Trust Reporting guide for the specialized annual filing, extension, penalty, EIN, and substitute Form 3520-A rules.

Substitute Form 3520-A

If a foreign trust with a U.S. owner does not timely file Form 3520-A, the U.S. owner can have an obligation to complete and attach a substitute Form 3520-A to the owner’s timely filed Form 3520 to avoid certain Form 3520-A penalties.

The timing is important because the substitute Form 3520-A generally is attached to the U.S. owner’s Form 3520 by the Form 3520 due date, including applicable extensions.

Exceptions for Certain Foreign Retirement and Tax-Favored Trusts

Not every foreign retirement, pension, medical, disability, or educational arrangement automatically requires Forms 3520 and 3520-A.

Current IRS guidance includes exceptions for certain qualifying arrangements, including specified Canadian RRSPs and RRIFs and certain tax-favored foreign trusts satisfying applicable requirements.

These exceptions do not necessarily eliminate separate Form 8938 or FBAR obligations.

Form 3520 and Form 8938

Form 3520 and Form 8938 serve different purposes.

A foreign trust interest, foreign account, inheritance, or financial asset may create Form 8938 reporting in addition to Form 3520, depending on the taxpayer’s circumstances and applicable thresholds.

Form 3520 and FBAR

Foreign trust or inheritance situations can also produce FBAR filing obligations.

For example, a taxpayer who inherits or receives control over foreign bank or brokerage accounts should separately determine whether FinCEN Form 114 is required.

When Is Form 3520 Due?

For a calendar-year individual, Form 3520 generally is due on April 15.

For certain U.S. citizens and residents living outside the United States and Puerto Rico, and certain military or naval personnel on duty outside the United States and Puerto Rico, the initial due date generally is June 15.

If the taxpayer properly extends the associated income tax return, the Form 3520 due date is also extended, but generally no later than October 15 for a calendar-year taxpayer.

Form 3520 is filed separately from the federal income tax return according to the IRS filing instructions.

Form 3520 Extension Trap for Taxpayers Abroad

Taxpayers abroad should pay particular attention to the maximum Form 3520 extension date.

A discretionary additional extension of the income-tax return beyond October 15 does not necessarily extend Form 3520 beyond October 15 for a calendar-year taxpayer.

The IRS also instructs taxpayers who extended their related income-tax return to properly complete the applicable extension information on Form 3520 to avoid the form being processed as late.

Penalty for Failure to Report a Foreign Gift

Failure to timely report a foreign gift or bequest subject to Section 6039F can produce a penalty equal to 5% of the amount of the foreign gift for each month or part of a month during which the failure continues.

The penalty is generally capped at 25% of the unreported foreign gift or bequest.

For a substantial foreign inheritance, the potential penalty can therefore be significant even when the underlying inheritance itself produced no U.S. income tax.

Foreign Trust Form 3520 Penalties

Foreign trust reporting failures have a different penalty framework.

For applicable Section 6677 failures, the initial penalty generally is the greater of $10,000 or the applicable percentage of the gross reportable amount.

Depending on the violation, that can include:

• 35% of the gross value of property transferred to a foreign trust for specified failures to report a reportable transfer; or
• 35% of the gross value of distributions received from a foreign trust for specified failures to report the distribution.

Different rules apply to U.S.-owner and Form 3520-A reporting failures.

Additional Penalties After IRS Notice

Additional penalties can apply where specified foreign trust reporting noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply.

Prompt response to an international information-return notice can therefore be important even where the taxpayer disputes the original penalty.

Reasonable Cause

The Form 3520 penalty provisions contain reasonable-cause relief when the taxpayer demonstrates that the failure resulted from reasonable cause and not willful neglect.

Reasonable cause depends on the facts and circumstances.

Potentially relevant facts can include:

• the taxpayer’s knowledge and experience;
• professional tax advice;
• information provided to prior preparers;
• the nature of the foreign transfer;
• whether the taxpayer reasonably understood the payment to be a gift or inheritance;
• the complexity of a foreign trust;
• access to foreign trust information;
• prior compliance history;
• when the taxpayer discovered the reporting failure;
• efforts to correct the omission; and
• other circumstances affecting the taxpayer’s ability to comply.

The IRS instructions specifically caution that foreign-law restrictions, foreign penalties for disclosure, reluctance by a foreign fiduciary, or trust provisions preventing disclosure do not by themselves establish reasonable cause for specified foreign trust reporting failures.

Current IRS Treatment of Delinquent Forms 3520

The IRS currently treats delinquent Forms 3520 differently from most other delinquent international information returns.

Most delinquent international information returns generally are attached to an amended income tax return. Delinquent Forms 3520 and 3520-A instead are filed according to the filing instructions for those forms.

See our Delinquent International Information Returns page.

Reasonable-Cause Statements on Delinquent Form 3520

A taxpayer asserting reasonable cause can attach a reasonable-cause statement to the delinquent Form 3520.

Under the IRS’s current delinquent-return guidance, reasonable-cause statements attached to Forms 3520 and 3520-A are considered before a penalty is assessed.

The IRS currently instructs taxpayers attaching such a statement to write ␜Reasonable Cause Statement attached␝ at the top of the first page of the applicable form.

What If I Received a Foreign Gift Years Ago and Never Filed Form 3520?

The first step is determining whether the reporting requirement actually applied.

Relevant questions include:

• Who transferred the property?
• Was the donor a nonresident alien, foreign estate, corporation, partnership, or trust?
• Was the transfer truly a gift or inheritance?
• What was the value?
• Were multiple related donors involved?
• Was the transfer actually a trust distribution?
• Were foreign accounts received or controlled?
• Was Form 8938 required?
• Were FBARs required?
• Was all income associated with the assets reported?
• Has the IRS already contacted the taxpayer?
• Does reasonable cause exist?
• Was the conduct non-willful?
• Does another offshore compliance procedure apply?

Form 3520 and Streamlined Filing Compliance

A missing Form 3520 can be part of a broader international tax compliance problem.

For example, the taxpayer may also have:

• unreported foreign income;
• missing FBARs;
• missing Forms 8938;
• foreign trust ownership;
• foreign trust distributions;
• foreign investment reporting; or
• other international information returns.

Where the failures resulted from non-willful conduct, the Streamlined Filing Compliance Procedures may need to be evaluated.

What If the Foreign Assets Were Intentionally Concealed?

If the facts suggest intentional concealment or potentially willful tax noncompliance, a taxpayer should not assume that simply filing a late Form 3520 or making a Streamlined submission is appropriate.

See our Willful vs. Non-Willful FBAR Violations discussion.

Potentially willful tax violations may require consideration of the IRS Criminal Investigation Voluntary Disclosure Practice.

Foreign Gifts From Covered Expatriates

Special rules can apply when a U.S. citizen or resident receives a gift or bequest from certain former U.S. citizens or former long-term lawful permanent residents who are treated as covered expatriates.

Those transfers can implicate Section 2801 and Form 708 rather than being treated as an ordinary foreign-gift reporting matter.

Frequently Asked Questions

Do I pay U.S. income tax on a gift from my foreign parents?

A genuine gift generally is not included in the recipient’s gross income merely because it came from a foreign parent. However, Form 3520 reporting may be required when the applicable threshold is exceeded.

What is the Form 3520 foreign gift threshold?

For gifts or bequests from nonresident alien individuals and foreign estates, the general reporting threshold is more than $100,000 in aggregate during the tax year, applying the related-person aggregation rules.

Is a foreign inheritance taxable?

A foreign inheritance is not automatically U.S. taxable income to the beneficiary merely because it came from overseas. Nevertheless, Form 3520 and other reporting requirements can apply.

What is the penalty for failing to report a foreign gift?

The Section 6039F penalty generally equals 5% of the unreported foreign gift or bequest for each month or part of a month that the failure continues, up to 25%.

Can reasonable cause eliminate the penalty?

Potentially. The applicable Form 3520 penalty provisions provide reasonable-cause relief when the statutory standard is satisfied.

Do I attach Form 3520 to Form 1040?

No. Form 3520 is generally filed separately according to its filing instructions rather than physically attached to the federal income tax return.

Does filing Form 3520 eliminate my FBAR requirement?

No. FBAR, Form 8938, and Form 3520 are separate reporting regimes.

I received money from a foreign trust. Is that just a foreign gift?

Not necessarily. A distribution from a foreign trust generally is analyzed and reported under the foreign-trust provisions of Form 3520 rather than simply treated as an ordinary foreign gift.

Can a foreign trust loan trigger Form 3520?

Yes. Certain loans and indirect benefits from foreign trusts can be treated as distributions for reporting purposes.

Official IRS Resources

• IRS — About Form 3520
• IRS — Instructions for Form 3520
• IRS — Gifts From Foreign Persons
• IRS — Foreign Trust Reporting Requirements and Tax Consequences
• IRS — Delinquent International Information Return Procedures

This page provides general information. Form 3520 requirements, foreign-gift characterization, foreign trust taxation, penalties, reasonable cause, and correction procedures depend on the taxpayer’s facts and applicable law.