Form 3520: 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 3520 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 the Form 3520 also goes on extension.
Form 3520 Filing Requirements
The 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 the Form 3520. The filing requirements depend on what 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 a form 3520 if the gift size exceeds the reporting threshold.
Reporting Foreign Gifts & Inheritance on 3520
The reporting of a foreign gift or inheritance is the main catalyst for having to file the form 3520.
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
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 the 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 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?
There are three categories of foreign persons for determining the Form 3520 reporting:
- Foreign Individual
- Foreign Entity
- Foreign Trust
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.
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 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 reporting is complicated.
Having an 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.
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