Form 3520 (2019) – Learn to Report Foreign Gifts, Inheritances & Trusts
- 1 Form 3520
- 2 Why is the Form Necessary?
- 3 Earning Income From the Foreign Gift
- 4 IRS Form 3520 –Estate Tax Purposes
- 5 Form 3520 – Gift vs. Inheritance
- 6 IRS Form 3520 – Threshold requirements
- 7 IRS Form 3520 Penalties
- 8 FBAR (Report of Foreign Bank Accounts)
- 9 What Can You Do?
- 10 We Specialize in Safely Disclosing Foreign Money
- 11 4 Types of IRS Voluntary Disclosure Programs
Form 3520 (2019) – Learn to Report Foreign Gifts, Inheritances & Trusts
Form 3520: Gifts, inheritances, and trust distributions from a Foreign Person, Business or Trust are reported with your Taxes to the IRS on a 3520 Form.
Oftentimes, using examples is an effective way to understand a topic that can be difficult, such as reporting Foreign Gifts and Trust Distributions.
Form 3520 refers to:
- Gift From a Foreign Person
- Inheritance from a Foreign Person
- Gift From a Foreign Business
- Distribution from a Foreign Trust
The form is technically referred to an Annual Return To Report Transactions With. Foreign Trusts and Receipt of Certain Foreign Gifts is one of the most important international tax forms when it comes to Foreign Money (Foreign Gifts and/or Foreign Trust Distributions).
Why? Because even though Form 3520 is merely a reporting form for foreign gifts or trust distributions received from foreign persons, the IRS has the authority to issue extensive fines and penalties against any individual who fails to properly filed the form.
Why is the Form Necessary?
There are many reasons why a Form 3520 may be necessary. While filing the form is used to report the receipt of a Foreign Gift from either a Foreign Individual or Foreign Business (or Foreign Trust Distribution) the form has a much more far reaching impact than just reporting the information. Moreover, in recent years (and with the enactment and enforcement of FATCA) the IRS has increased enforcement of this form.
Earning Income From the Foreign Gift
At Golding & Golding, we like to use examples. Tax Law can de dense (read: Boring) and we don’t want you to be that bored this early in the article For example, let’s say Michelle received a million-dollar gift from a family member overseas. That gift is in the form of an investment fund that is spread throughout various different accounts and trading firms worldwide.
Thus, Michelle may have $500,000 in Hong Kong, a few hundred thousand dollars in Brazil, and some other investments scattered throughout China, Taiwan, and Portugal.
While the receipt of the gift is not taxable to Michelle (the recipient of the gift does not pay any income tax or gift tax) and the person who transferred the gift is not subject to any U.S. reporting (Michele’s grandma is a non-US person with no US reporting requirements) – what happens to the income generated from the gift?
In other words, while the gift itself is not taxable, the income being generated to Michelle from the Foreign Gift is absolutely taxable. Moreover, many foreign financial institutions (even with FATCA in play) do not issue 1099-INT or 1099-DIV equivalents to report distributions. Therefore, how would the Internal Revenue Service know that Michelle received a $1 million gift that is generating upwards of $70,000 – $100,000 a year in income?
By requiring individuals to file Form 3520, the IRS can track how much money and the type of gift Michelle received.
IRS Form 3520 –Estate Tax Purposes
The Internal Revenue Service also likes to track whether a person who is subject to US tax (and may be subject to estate tax in the future) may have received foreign gifts (which in addition to other worldwide assets the individual owns) may lead to an estate tax issue.
Here’s another example: Scott is a US person who resides in Southern California. Scott has a net worth of $3.5 million. Therefore, if Scott passed away today, his estate would not be taxed. But, recently Scott received a $7 million gift from his grandma, which was an inheritance. Some of the money has been transferred to the United States while some of the funds remain abroad.
For U.S. Estate Tax purpose, it does not matter where Scott keeps the money or the assets. If Scott is the owner of the money/assets and he was to suddenly passed away, then his estate would have to pay estate tax on the value of the gift that exceeds (~$5.47 Million COLA).
But, since only half of the money was transferred to the United States, how would the IRS be aware of the additional $2-$3 million that Scott is the rightful owner of, but is located overseas? That is where Form 3520 comes in.
By requiring Scott to file a Form 3520, the IRS will be updated as to the value of Scott’s current assets.
Therefore, if Scott was to pass away and the estate tax laws have not changed, if the IRS did not know about Scott’s foreign assets, the IRS could be out upwards of $1 million.
Form 3520 – Gift vs. Inheritance
One technical nuance to keep in mind is that while all gifts are not inheritances, all inheritances are gifts. Therefore, if a person who is a U.S. person receives a foreign inheritance, it is considered a gift — and if it meets the threshold requirements required to file a Form 3520, then the person would have to file the Form 3520 to report the gift even though the gift is in the form of an inheritance.
IRS Form 3520 – Threshold requirements
There are various threshold requirements for when a person is required to file a form 3520. The threshold requirements vary depending on whether the persons receiving a gift from a foreign individual, from a foreign business, or a trust distribution.
IRS Form 3520 – Foreign Gift From an Individual
When a person receives a foreign gift from an individual, they must report the receipt of the foreign gift on a form 3520 if the gift (in either one transaction or a series of transactions) exceeds $100,000 in any given tax year.
Therefore, whether or not you received a $150,000 gift from your mom, or received a series of $15,000 gifts from your mom in the same year – you would still have to file Form 3520.
IRS Form 3520 – Foreign Gift From a Business
The threshold requirements for having to file a Form 3520 upon the receipt of a gift from a business are much lower. If you received a foreign gift from a business that exceeds ~$15,000 COLA (Cost of Living Adjustment), then the person is required to file a form 3520 to report the gift.
IRS Form 3520 – Foreign Trust Distributions
With Foreign Trust Distributions, the IRS is very stringent. In fact, a person is required to file a form 3520 when he or she receives any trust distribution at all during the year from a foreign trust. There is no minimum threshold requirement for having to report the receipt of the trust. Therefore, if you are the beneficiary of a foreign trust in you received a trust distribution it is important that you file the form 3520 timely.
IRS Form 3520 Penalties
The penalties for failing to file form 3520 are located in Internal Revenue Code Section 6677, and are as follows:
– A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or:
– 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or
– 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or
– 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.
Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
FBAR (Report of Foreign Bank Accounts)
If the gift is money or investment accounts which are being held in your name overseas, you may be subject to FBAR filing requirements.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury when a person, trust or business owner has more than an annual aggregate amount of $10,000 in foreign and overseas accounts.
The penalties for failing to file the FBAR can reach 100% value of the foreign accounts, so it is important that if you have not filed FBAR forms (or IRS Form 8938) that you get into compliance quickly.
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.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
Contact Us Today; Let us Help You.
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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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