The Form 3520 Reporting Requirements Explained 2023

Form 3520

Form 3520

The IRS Form Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts in accordance with Internal Revenue Code Section 6039F is a deceptive international information reporting form. While the form itself is not as complicated as other forms, such as Form 5471 — the penalties for non-compliance are simply outlandish. When a U.S. person receives a gift from a foreign person, the IRS may require the U.S. person to file a Form 3520 to report the transactions. There are certain filing threshold requirements that the gift(s) must meet before the U.S. person is required to file the form, and the related party rules apply. The threshold for reporting foreign gifts on form 3520 varies depending on whether the gift is received from an individual or entity. The reporting threshold for gifts received from a foreign individual is significantly higher than the reporting threshold for a gift from a foreign entity. The form is due to be filed at the same time a person files their tax return.  If a person files an extension for their tax return, then the time to file Form 3520 also goes on extension.  The failure to properly report the form may result in 3520 penalties, which may culminate with the Taxpayer receiving a CP15 penalty notice. Let’s review the basics of Form 3520:

Form 3520 Filing Requirements

Form 3520 is technically referred to as the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Not everyone who is a US person and receives a gift from a foreign person will have to file Form 3520. The filing requirements depend on the value of the gift(s) was, and whether the gift was given by a foreign individual, entity, or trust.

*Even if a U.S. person is not required to file a tax return, they may still have to file the form if the gift size exceeds the reporting threshold.

Reporting Foreign Gifts & Inheritance on Form 3520

The reporting of a foreign gift or inheritance is the main catalyst for having to file the form.

US Persons may be required to file this form if they received either:

A large gift

• • • A series of gifts from the same person

    • A gift from a foreign business

    • A foreign trust distribution

    • Ownership of a foreign trust

    • Other foreign trust transactions

Type of Foreign Gift

A gift is not limited to money. In other words, whether a person receives cash from overseas or other items that have cash value — they may be subject to the reporting rules.

Therefore, before filing Form 3520, the first step is to evaluate the value of the gifts received.

How to Value a Gift from Foreign Person

Typically, individuals can use any reasonable exchange rate that was published during that tax year. Both the Internal Revenue Service and the Department of Treasury publish different exchange rates.

There is nothing wrong with picking one rate over the other if the rate is more beneficial to the filer.

What is the Source of the Gift?

The source of the gift will determine the proper reporting requirements. More specifically, whether or not the transaction was with a foreign individual, entity or trust will determine the US Person reporting requirements.

Who is a Considered a Foreign Person for Form 3520?

There are three categories of foreign persons for determining the Form 3520 reporting:

• • • Foreign Individual

    • Foreign Entity

    • Foreign Trust

Foreign Individual

For example, when a person receives a gift from a foreign person individual, the reporting kicks in when the value of the gift (or series of gifts) exceeds $100,000. In other words, if a person receives a single gift from an individual who is a foreign person and the gift amount was $99,000 USD, then they would not have to report to the gift. Alternatively, if they received two gifts from the same person each valued at $55,000 USD each, then they 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 or Foreign Partnership

The threshold requirements for having to file a gift received from a foreign corporation or foreign partnership is significantly lower than it is for a foreign person.  If the value of the foreign gift(s) received from a foreign corporation or partnership exceeds $16,388, then the U.S. person is required to report the gift on Form 3520.

*Unlike receiving a gift from a foreign person in which they do not have to identify the name of the donor, if the gift came from a foreign business then the IRS wants to know the name of the foreign business.

Foreign Trust

Foreign trust reporting is very complex.

Having ownership in a foreign trust and/or receiving a distribution from a foreign trust may require that the U.S. person file form 3520. There may be additional filing requirements as well, including Form 3520-A.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.