Form 3520 and Penalties: Who Must File and What if You File Late?

Form 3520 and Penalties: Who Must File and What if You File Late?

Form 3520 and Penalties

This article has been updated from the original August 2021 publication date.

While the FBAR is the most common type of international information reporting form that US persons with foreign accounts may have to file, there are several other types of IRS foreign tax forms that US persons may have to file as well — and Form 3520 is a good place to start. Form 3520 is one of the most common international reporting forms besides the FBAR. It is an international reporting form that requires US persons to report certain foreign gift and trust transactions, including:

      • Receiving a large gift from a foreign individual or entity,

      • Receiving a trust distribution from a foreign trust,

      • Maintaining ownership of a foreign trust, and

      • other various transactions with a foreign trust

Let’s walk through the basics of Form 3520, along with the code sections that authorize the IRS reporting requirements:

Section 6039F

in pertinent part:

      • (a) In general If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.

      • (b) Foreign gift For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

Notice 97–34, Page 2

in pertinent part:

      • This notice provides guidance regarding the new foreign trust and foreign gift reporting provisions contained in the Small Business Job Protection Act of 1996.

        • 1. Gifts from foreign individuals and foreign estates. A U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the aggregate amount of gifts from that nonresident alien or foreign estate exceeds $100,000 during the taxable year.

          • Once the $100,000 threshold has been met, it is expected that Form 3520 will require the donee to separately identify each gift in excess of $5,000, but will not require the identification of the donor.

        • 2. Purported gifts from foreign corporations or foreign partnerships A U.S. person is required to report the receipt of purported gifts from foreign corporations and foreign partnerships if the aggregate amount of purported gifts from all such entities exceeds $10,000 (as modified by costof-living adjustments under section 6039F(d)) during the taxable year.

          • Once the $10,000 threshold has been met, it is expected that Form 3520 will require the donee to separately identify all purported gifts from a foreign corporation or foreign partnership, including the identity of the donor entity

          • Purported gifts from foreign corporations or foreign partnerships are subject to recharacterization under new section 672(f)(4).

Section 6048

In pertinent part:

      • (3) Reportable event For purposes of this subsection—

        • (A) In general The term “reportable event” means—

          • (i)cthe creation of any foreign trust by a United States person,

          • (ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and

          • (iii) the death of a citizen or resident of the United States if—

            • (I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or

            • (II) any portion of a foreign trust was included in the gross estate of the decedent.

What is Form 3520?

Form 3520 is an IRS form. Unlike a tax return form, the purpose of Form 3520 is not necessarily to report income or to compute tax calculations (although this can be the case when it involves trusts) but rather to report certain gifts and other trust-related transactions to the IRS. In other words, the form is an information reporting form. So, for example, if a US person receives a gift of $700,000 from a non-resident alien, the US person is required to report this information to the IRS on Form 3520.

Who Must File Form 3520?

There are various scenarios in which a taxpayer may have to file Form 3520. Typically, it is used by US person individuals who either received a gift from a foreign person, received a trust distribution from a foreign trust, or have ownership or other certain transactions with a foreign trust. The threshold requirement for reporting foreign gifts from individuals/related parties is met when the total value of the gifts exceeds $100,000 in the tax year. If the gift is from a foreign entity, the value adjusts each year for inflation — and is currently around $18,000. There is no minimum threshold requirement for reporting a foreign trust distribution.

What is Reported on Form 3520

Depending on the type of transaction the person has will dictate what must be reported on Form 3520 — and the reporting requirements can vary extensively. For example, if a person receives a gift from a foreign individual, then they generally only have to report the date of the gift, the type of gift, and the value. Conversely, if a person has to report foreign trust transactions it can get very detailed depending on the amount of the distribution, whether a beneficiary statement was distributed to the taxpayer, and what was the total amount of distributions in prior years relative to the current year.

When is Form 3520 Due?

In general, form 3520 is due at the same time that the Taxpayer’s tax return is due. Depending on whether a form 3520-A is also required may impact the due date.

Can You Apply for an Extension for Form 3520?

Yes, extensions for filing Form 3520 are available. If the taxpayer files an extension for their tax return, then the form 3520 goes on extension as well. Likewise, it is important to note that when it comes to Form 3520-A, the due date is typically March — and taxpayers must file Form 7004 to apply for an extension as opposed to Form 4868 for Form 3520.

What if You File Form 3520 Late?

When a US person taxpayer files a late form 3520, they may be subject to extensive fines and penalties. If the taxpayer can show reasonable cause, then they may be able to have the penalty waived or avoided in the first place. There are various procedures that taxpayers can pursue in order to obtain a waiver of the penalty, including an appeal or Collection Due Process Hearing. Taxpayers may also pursue tax court or federal court if they are seeking to litigate the matter, but for federal court, it generally requires the taxpayer to make payment first.

What are the Penalties for 3520 Late Filing?

Typically, when it comes to foreign gifts — which is the most common type of penalty under Form 3520 — the IRS can penalize the taxpayer 5% value of the gift for a total penalty of 25%, which represents five months’ worth of penalty at 5%.

Does Farhy Help Eliminate Form 3520 Penalties?

There was a recent Tax Court ruling in the case of Farhy, which we have summarized here in Farhy v Commissioner of Internal Revenue. In Farhy, the case involved Form 5471 — which is another international information reporting form — where the tax court said that the IRS did not have the power to assess penalties short of filing a lawsuit against the taxpayer. The Form 3520 is similar in nature to Form 5471 so there is an argument that the rules can also apply to Form 3520, noting that the IRS recently filed a notice of appeal in Farhy so it appears the IRS have every intention of fighting the tax court’s decision.

Form 3520 Penalty Avoidance, Abatement, and Amnesty

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 that 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.