Form 3520: Information Return for Foreign Gifts and Trusts 2024

Form 3520

Form 3520

While there are many different international information reporting forms that a U.S. taxpayer must be aware of when it comes to tax filing season, IRS Form 3520 might be one of the most important foreign IRS tax forms to file timely. Form 3520 is the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts under 26 U.S.C. 6039F and the Form is used for many different purposes — with a focus on foreign gift and trust reporting.

Some of the most common reasons Taxpayers must file Form 3520 are because the Taxpayer:

• • • Received a Gift from a Foreign Individual,

    • Received an Inheritance from a Foreign Individual,

    • Received a Foreign Trust Distribution,

    • Ownership of a Foreign Trust, and

    • Certain Transactions with Foreign Trusts.

For taxpayers seeking a shortened summary, we have our ‘5 Facts to Know About Form 3520,’ (Published by Golding & Golding in 2020, Updated in 2024) and other articles on specific issues such as Form 3520 threshold filing requirements, Exceptions, Penalties, and examples.

Why is Form 3520 So Important?

The reason why it is so important to file a timely Form 3520 is because when a taxpayer fails to file Form 3520 timely, it can lead to significant fines and penalties — upwards of 25% value of the gift or a portion of the trust depending on whether it is the owner or the beneficiary of the trust who fails to report timely.  Making matters worse, Form 3520 penalties are ‘automatically assessable penalties‘ and do not go through the deficiency procedures — a point the IRS and Treasury Department drove home in the proposed regulations published in May of 2024.

With all the recent changes in updates to form 3520 come and let’s walk through some of the basics involving:

• • • Who Must File IRS Form 3520 and Examples

    • When is the Form 3520 Due

    • Additional Complexities For Foreign Trust Owners (4790, UNI/DNI, Throwback Rule)

    • Form 3520 Late Filing

    • Form 3520 Penalties (Deficiency Vs Automatically Assessable)

    • Foreign Gift and Trust Amnesty

Who Must File IRS Form 3520?

Form 3520 is required by taxpayers who receive a large gift from a foreign individual, foreign entity, or foreign trust — as well as certain transactions with a foreign trust including trust ownership and transfers.   There are some important nuances to be aware of as well. For example, the values of gifts from related parties may be aggregated for purposes of the reporting thresholds — in addition, when certain gifts are made directly to institutions such as universities for tuition or hospitals for medical care, these gifts are not reported on Form 3520.

Examples of Form 3520 Reporting

Here are a few common examples of situations that require Form 3520:

Gift From a Foreign Individual Example

David is a lawful permanent resident who lives in the United States. He recently received a gift of $900,000 from his mom who is a non-resident alien living in Taiwan.

Gift From a Foreign Entity Example

Scott is a U.S. citizen who has family members abroad. One of his family members owns a foreign company and that foreign company gifted Scott $30,000.

Gift From a Foreign Trust Example

Michelle is a U.S. citizen but her grandma is a non-resident alien who formed a foreign non-grantor trust and made Michelle one of the beneficiaries. In the current year, Michelle received a foreign trust distribution of $75,000.

Ownership of Foreign Trust Example

Peter is a U.S. citizen who formed an offshore asset protection trust a few years back. Peter is a 100% owner of the trust.

Transfer to a Foreign Trust Example

Dana is a U.S. citizen who has siblings who live overseas and are non-resident aliens. These siblings have a foreign trust which primarily consists of ownership of foreign rental properties. Dana transferred $2,000,000 to the foreign trust making her a 25% owner of the trust.

When is Form 3520 Due?

The Form 3520 is due at the same time that a person’s tax return is filed, which is typically April — unless on automatic extension or one of the expat return dates apply. If a taxpayer wants to extend the time to file Form 3520 then they would have to extend the time to file their tax return. It is important to note, that the extension requirements for form 3520-A are different and that requires the taxpayer to file Form 7004.

Foreign Trust Reporting (4790, UNI/DNI, Throwback Rule)

While reporting foreign gifts on Form 3520 is relatively straightforward, foreign trust reporting could be much more complicated. That is because foreign trusts come in all different shapes and sizes, and sometimes the foreign trust information does not fit neatly on Form 3520. In addition, there are several other factors to consider when a person is reporting form 3520 for a foreign trust.

Here are some common issues to be aware of:

Foreign Non-Grantor Trust Beneficiary Statement

If the taxpayer does not receive a non-grantor trust beneficiary statement, then the tax implications may be worse than they should be because the taxpayers are required to calculate income without the benefit of taking into consideration the nature of the distribution. In other words, if the taxpayer receives a foreign non-grantor trust beneficiary statement that might indicate certain distributions were non-taxable corpus for example, then it may impact whether the distribution was income to the taxpayer or a gift from the trust — and this can impact how the distribution is taxed.

UNI/DNI and Throwback

With a foreign trust, there are more strict rules involving the throwback rule and distributable net income versus undistributed net income. When DNI becomes UNI, then oftentimes the income loses certain beneficial characteristics that it may have had if it was distributed in that year that it was DNI (noting there are already some restrictions on characterizations of income for foreign trust versus domestic trusts). This can result in a higher tax liability to the U.S. beneficiary who received the distribution. Likewise, depending on how long the income was remaining in the foreign trust before was distributed in conjunction with the total amount of distributions in the past years, may result in an accumulation distribution and additional taxes slash interest. It may necessitate the following of Form 4790.

Exceptions Trust

When it comes to a foreign trust, there are some exceptions to having to report on Form 3520. For example, an RRSP or RRIF is exempt from having to file form 3520 under Revenue Procedure 2014-55. In addition, certain tax-favored retirement and non-retirement trusts may avoid having to file form 3520 although those exceptions are limited and taxpayers should carefully review the recent proposed regulations and Revenue Procedure 2020-17 to determine whether their foreign retirement trust may be exempt from reporting on Form 3520.

Form 3520 Late Filing Penalties

The Form 3520 late filing penalties can be significant, when the late filing refers to a large foreign gift, the taxpayer can be penalized 5% a month up to a total value of 25%. Referring back to the example above, if the taxpayer received the gift of $900,000 but filed Form 3520 several months late, they could be looking at a $225,000 penalty, along with interest if the taxpayer does not pay the penalty immediately when it is assessed. When it comes to a foreign trust, various penalties are depending on whether it is the beneficiary or the owner of the trust along with the total value of the trust and the person’s ownership in that foreign trust.

Form 3520 Penalties (Deficiency vs Automatically Assessable)

Another very important aspect of Form 3520 is that the penalties do not follow deficiency procedures, but are rather automatically accessible penalties. In other words, when the IRS penalizes a taxpayer for not filing Form 3520, they do not have to go through the hassle of the deficiency procedures to provide the taxpayer notice before the penalty is issued — and then allow them to challenge it before the penalties are assessed. Rather, with Form 3520 penalties which are automatically assessed, the IRS could simply issue a CP-15 notice and now the taxpayer’s first opportunity to challenge the IRS is after the penalty was issued, which puts the taxpayer in a much more difficult position and limits what options they have to dispute the penalty.

Form 3520 Amnesty

Taxpayers who are out of compliance but have not yet been penalized may want to consider one of the offshore amnesty programs by working with a Board-Certified Tax Law Specialist who specializes exclusively in offshore disclosure to safely get into compliance compared to the taxpayer who has already been penalized then they may qualify for reasonable cause exception slash professional reliance to get the penalties abated.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other 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. 

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.