Form 3520 Instructions (IRS Summary 2019-2020)
- 1 Form 3520 Instructions
- 2 Reporting Foreign Gifts & Inheritance
- 3 Who Gave You the Gift (aka the Source)?
- 4 Completing Form 3520
- 5 Late Form 3520
- 6 Form 3520 FAQ
- 7 Form 3520 (Overview)
- 8 Get Into IRS Compliance
- 9 What Can You Do?
- 10 Form 3520 Amnesty – Golding & Golding (Board-Certified)
- 11 Recent Golding & Golding Case Highlights
- 12 How to Hire Experienced Form 3520 Counsel?
- 13 Interested in Learning More about Golding & Golding?
Form 3520 Instructions: The Form 3520 instructions can be very complicated. The IRS has developed an aggressive enforcement strategy involving foreign accounts, assets & gift compliance. Unlike other international reporting forms such as an FBAR or Form 8938 — for many people, the 3520 form is just a “one-off.” In general, the IRS requires U.S. persons who received gifts from foreign persons to report the gift to the IRS. The filers reports the gift on a form 3520. The form is due to be filed at the same time a persons files their tax return. The failure to properly report the form may result in significant fines and penalties. To assist you, we have developed our own Form 3520 Instructions handbook.
Form 3520 Instructions
The Form 3520 instructions are published, revised and updated each year. The instructions are designed to assist you with preparing Form 3520 (foreign gifts, inheritance, and trusts)
Technically, it is called the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. There are some exceptions to filing that can be found in the IRS instructions, but they tend to involve trust reporting vs. gift reporting.
The purpose of the 3520 form is to require certain U.S. person recipients to report gifts, inheritances and trusts transactions involving “foreign persons,” to the IRS.
While the Form can be used to report gifts and trust transactions, this summary will focus on gifts and inheritances from foreign persons.
The Form 3520 Instructions from the IRS can be dense (and altogether overwhelming). Therefore, we prepared the following Guide to help you get compliant.
Who Has to File?
Not everyone who receives a foreign gift, inheritance or trusts has to file the Form 3520.
As provided by the IRS, those required to file the form include:
U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:
- Certain transactions with foreign trusts.
- Ownership of foreign trusts under IRC sections 671 through 679.
- Receipt of certain large gifts or bequests from certain foreign persons.
Golding & Golding’s summary of the IRS Form 3520 instructions will help guide you through the preparation of the form — since the IRS instructions themselves can be a bit daunting.
Reporting Foreign Gifts & Inheritance
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:
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.
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.
Who Gave You the Gift (aka the Source)?
The source of the gift will determine the proper reporting requirements.
Who is a 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.
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.
Completing 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.
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)
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.
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.
Form 3520 FAQ
Who has to report?
Form 3520 Gift
A Form 3520 Gift can be broken down further into gifts from a foreign person (individual) and gifts from a foreign corporation. There are different thresholds for reporting, depending on whether it was a foreign individual (+$100,000) or foreign corporation (+$15,500)
Form 3520 Inheritance
A Form 3520 Inheritance is a sub-set of a gift. In other words, the inheritance is a form of gift, so an inheritance from a Foreign Person requires a Form 3520.
Form 3520 Trusts
Unlike a foreign gift or inheritance there is no minimum “floor” for filing a Form 3520 when you receive foreign trust distributions. Essentially, if you receive a foreign trust distribution, you would file a Form 3520.
Form 3520 (Overview)
Common questions we receive about Form 3520:
What is the Purpose of Form 3520?
The Purpose of Form 3520 is for U.S. Person to report the receipt of a gift, inheritance or trust distribution from a foreign “Person.” It is important to note that a Foreign “Person,” is not limited to Foreign “Individuals.”
Who Should File Form 3520?
Any U.S. person who meets the threshold requirement for the receipt of a gift, inheritance or trust distribution from a foreign person.
How to File Form 3520?
Form 3520 is filed alongside your U.S. Tax Return 1040 (unlike other forms, such as Form 3520-A and 5471, which can have different due dates).
Do I Need to File Form 3520?
If you meet the threshold filing requirements, then you generally have to file the Form 3520, unless an exception, exclusion or limitation applies.
Is there a Form 3520 Extension?
Yes. when you apply for an extension for your tax return, your Form 3520 goes on extension as well.
Do I Report Form 3520 for a Foreign Gift?
Maybe. It is important to keep in mind, that the terminology and requirements is reporting a “Gift From a Foreign Person.”
Is Form 3520 included in TurboTax?
As of the most current version of TurboTax, it does appear Form 3520 is included.
What is Form 3520 IRS?
It is the same as a Form 3520, just with the IRS (Internal Revenue Service) acronym attached to it.
Do I File Form 3520 for an Inheritance?
Yes. Technically, an Inheritance is a form of a Gift. In other words, you did not “earn” the income per se, so it if was not earned, then it would generally be considered a gift.
What is a Form 3520 Gift?
A Form 3520 Gift is essentially any Gift from a Foreign Person, that meets the threshold requirements for reporting.
Form 3520 Example
David resides in the U.S. as a Legal Permanent Resident. His parents are citizens (non-U.S. Persons) of Taiwan. His parents want to congratulate David for graduating medical school (way to go, David!). They gift him $800,000 to buy a house.
The gift is reported on Form 3520.
Are there Form 3520 Attachments?
It depends on the type and form of reporting, including what is being reported, and if it is timely or late.
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.
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.
Form 3520 Amnesty – Golding & Golding (Board-Certified)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
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We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Form 3520 Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.