How to Avoid Foreign Gift & Inheritance Penalty Traps

While there are many different types of international information reporting penalties that the IRS can assess against taxpayers, the foreign gift penalty for failing to report Form 3520 promptly is one of the most commonly issued foreign information reporting fines that the IRS tends to assess. Unlike other types of penalties, the foreign gift penalties are not just based on failing to file the form, but rather are based on the value of the foreign gift that went unreported. For example, if a taxpayer receives $1,000,000 gift from a foreign person and they do not report that gift on Form 3520 and more than five months pass, then the taxpayer is subject to a $250,000 penalty or even if there is no unreported income. In contrast, FBAR non-willful, civil penalties are based on the failure to file the FBAR form and not the value of the accounts.

Let’s take a look at what a taxpayer can do to try to avoid the foreign gift penalty traps in 2025 and 2026.

Know the Nuances of Foreign Gift Reporting

It is important to note that while the Form 3520 to report foreign gifts is not the most difficult international tax form, there are some nuances to keep in mind to determine whether you have to file or not.

No Tax Return Required (Nuance 1)

You have to file Form 3520 even if you are not required to file a tax return in that year if you are a U.S. person and you meet the threshold requirements for having to file Form 3520.

Combined Gifts (Nuance 2)

The gift does not have to come from one person to meet the threshold.

For example, if a taxpayer receives a gift of $65,000 each from two different related persons in the same year, then even though neither gift exceeds $100,000, since the combined total value of the gifts from the related parties exceeds the reporting threshold, Form 3520 is required.

The Gift Does Not Have to Be in the U.S. (Nuance 3)

Some taxpayers are under the misconception that the gift has to arrive in the United States for the taxpayer to be required to report it on Form 3520, but that is not correct.

For example, if the taxpayer receives a gift of $200,000 from a foreign person but that money does not transfer to the United States, the gift is still reportable. Likewise, if the taxpayer receives a gift of a foreign property worth $500,000, the value of that property is still reportable even if the property is not being rented and even though the property is located outside of the United States.

File Form 3520 Timely and the Correct Address

Taxpayers should be aware that Form 3520 is due in April unless the taxpayer lives overseas and/or filed for an extension. Likewise, the mechanism to file an extension for Form 3520 is different than Form 3520-A. In addition, the Form 3520 is submitted to Ogden, UT, even if the taxpayer submits their tax return to a different location

Late Form 3520 Submissions

For taxpayers who did not file a timely Form 3520 and have not been penalized, they will want to consider filing a late Form 3520 with a reasonable cause submission. It is important that taxpayers work with counsel that is experienced in submitting these types of forms and has successfully avoided and abated Form 3520 penalties in the past.

*While the IRS intended to eliminate the automatically assessed penalty issue involving Form 3520, at the time of this article, they have not yet made any formal changes.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their 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 (such as FBAR and FATCA) 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 who 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.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.