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IRS Form 3520 Instructions (2018) – Key Steps to Reporting a Foreign Gift

IRS Form 3520 Instructions (2018) – Key Steps to Reporting a Foreign Gift

IRS Form 3520 Instructions can be difficult to digest, since it involves multiple jurisdiction and bodies of law.

Common questions we receive regarding Form 3520 are:

  • When do I file Form 3520?
  • Do I report Foreign Gifts?
  • Do I report Foreign Inheritances?
  • Is there a Foreign Inheritance Tax?
  • What are the penalties for not filing form 3520?
IRS Form 3520 Instructions (2018) – Key Steps to Reporting a Foreign Gift by Golding & Golding

IRS Form 3520 Instructions (2018) – Key Steps to Reporting a Foreign Gift by Golding & Golding

When you receive a gift from a foreign person and if you meet certain threshold requirements, then you are required to report the gift.  The following a summary of Form 3520 Instructions — the key steps necessary to reporting a Foreign Gift or Inheritance.

Form 3520 Instructions

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

Sometimes, the IRS instructions can be a bit overwhelming. The form 3520 can be either relatively simple or more difficult depending on the nature of the gift or distribution you received. Some people choose to complete this form themselves (usually if they have a low, one-time gift and are not worried about getting audited). Other clients prefer to hire us despite the deceptively easy form, just for peace of mind. Whatever you choose, here are some key issues to consider:

1. What is the Type of 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.

*If you received a trust distribution, no matter what the value or amount of the distribution was, you will have to report it on form 3520.

2. What is the Value of the Gift?

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.

3. What is the Source of the Gift?

The source of the gift will determine the proper reporting requirements.

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. Why? 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 $15,671, 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 rather facilitate the gift to come from a foreign individual instead – 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.

Foreign Trust

As we’ve written about numerous times on different blog posts and for other publications – the IRS hates foreign trusts. The IRS believes any foreign trust is only being used for offshore tax and money laundering purposes. Obviously this is not true, but if you received any distribution of any amount from a foreign trust, then it needs to be reported.

While the reporting requirements for receiving a gift from a foreign person is not so bad at all, receiving a foreign trust distribution is brutal. 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 lawyer first.

4. Don’t Forget to Complete Page 1 of Form 3520

No matter whether you are receiving distribution from an individual, corporation/partnership or trust, you will have to complete page 1 of form 3520. Page 1 is relatively straightforward and simply asks some background information regarding the taxpayer.

5. No Trust? Continue to Section IV

If you did not receive any distributions from a foreign trust, you can pass go and move all the way along to part IV. Part four asks very basic information regarding the foreign gift.

Namely, it just asks:

  • The Date Of The Gift
  • The Description Of The Property
  • The Fair Market Value Of The Property
  • The Donor (Foreign Businesses)

6. Don’t Forget to Sign the Form

On the bottom of page 6, you are required to sign this form. It is important that you sign the form, because if you do not sign a form the IRS may reject it.

7. Filing a Late Form 3520

This can be a problem. The reason why is because the IRS has authority to penalize you significant amounts of money based on the value of the gift if you do not report it.

The IRS takes this matter seriously mainly because of estate tax purposes. For a more comprehensive summary on this issue, please click here.

For a brief summary, consider the following: Michael receives a foreign gift of $10 million. When Michael receives the $10 million, it is not taxable to Michael. Five years later, Michael passes away. He is single, so there is no one to claim any portability. In addition, he does not have any charitable donations or other gifts to consider. At the time of his death, Michael’s estate would be taxed 40% of any amount over the value of the estate tax exclusion, which in 2017 is $5.49 million.

The tax liability is around $2 million. If Michael never filed Form 3520, then the IRS would not be aware that Michael had $10 million (since the gift was overseas and via multiple bank accounts as an inheritance he received from his aunt). Thereafter, the IRS learns Michael did not report this gift, they could severely penalize the estate upwards of 35% of the value of the gift — in addition to tax liability.

Get Into IRS Compliance

If you are seeking to get into compliance for a late filed 3520 there are few different alternatives.

The alternatives will depend on whether the form 3520 is a stand-alone issue, whether there are also other unreported foreign accounts, income, etc. in which the person may consider a streamlined application instead of a reasonable cause submission (presuming of course, that the individual was non-willful and/or had reasonable cause), the amount of unreported gift, inheritance or trust distribution, etc.

Typically, the best option may be for you to enter of the approved IRS Offshore Voluntary Disclosure Programs.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Recent cases we had to fix after taking over from less experienced counsel that flubbed the case can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.