Form 3520 – Gift From Foreign Persons | Reporting Foreign Inheritance
What is Form 3520?
Form 3520 is used to Report the Receipt of a Foreign Gift from a:
- Foreign Person
- Foreign Business
- Foreign Trust
Form 3520 Rules
Receiving a Gift or an Inheritance from a Foreign Person, Trust or Business may spark the requirement for an individual receiving the gift or inheritance to file form 3520 with the IRS for the year the gift or inheritance was received.
The failure to properly/timely file form 3520 may result in significant fines and penalties towards the individual who received the gift or inheritance.
The General Rule
The concept of tax vs. receiving foreign gifts or inheritances from a foreign person can be complex. The purpose of this article is to break down the basic requirements – it does not serve as a comprehensive analysis of whether you, in your particular situation is required to file the form.
We understand that there are certain circumstances in which you may be able to be exempt from filing, but that is not the purpose of this summary – it is simply to inform you of when you may have a requirement.
Foreign Gifts from Individuals
The most common scenario that we deal with at Golding & Golding, is when a person receives a foreign gift, in the form of money or equivalent, from a foreign person. Many countries have various different currency restrictions, which limits the amount of gift an individual can personally provide via transfer (read: China and Taiwan currency restrictions).
With that said, it does not really matter what means the foreign person used to transfer the money to the United States, but rather did that foreign person gift you his or her money.
Threshold Requirement – Gifts from a Foreign Person
Currently, if a person receives more than $100,000 from a foreign person in a single year, in either one transaction or a series of transactions then the person who received the gift or inheritance from the foreign person must file a form 3520. It does not matter how the money was transferred, but rather who owned the money that was transferred.
For Example: Scott’s mother in Taiwan transferred him $500,000 in a single year by having 10 of her friends each transfer $50,000 to Scott’s bank account in the United States. Yes, not one individual actually transferred more than $100,000, but the $500,000 originated from a single person who owned that $500,000 and therefore the recipient would report to get from the owner of the money.
Threshold Requirement – Trust Distribution
Unlike the receipt of a gift or inheritance from a foreign person, when a person receives a trust distribution from a foreign trust, they are required to complete Form 3520 irrespective of how much the person received from the foreign trust.
In other words, there is no minimum threshold requirement involving a receipt of money from a foreign trust, and therefore any receipt of money from a foreign trust must be reported on a Form 3520.
It should be noted, that unlike the other two categories, the reporting requirement for the receipt of a trust distribution from a foreign trust is much more detailed than the reporting requirement for the receipt of a gift from either an individual or business.
It may also necessitate the filing of a Form 3520-A.
Threshold Requirement – Gift From a Foreign Business
The threshold requirement for having to file a form 3520 for the receipt of a gift from a foreign business is much lower than the threshold requirement for receiving a gift from a foreign person. In 2016, the threshold requirement was $15,671 from either a foreign corporation, foreign partnership or other foreign entity.
Why Does the IRS Care?
There are many reasons why the IRS wants to keep track of gifts, inheritance or trust distributions received from a foreign person, business or trust – but one of the main catalysts is for the future determination of estate tax.
When a person meets the requirements of being a US person for estate tax purposes, their estate will be taxed at 40% for any amount that exceeds the gift and estate tax exemption. Currently, the exemption is set at $5.49 million, but that amount can change at any time (especially when a new party takes office).
What a person is considered a US person for estate tax purposes, their worldwide value is taken into consideration for estate tax purposes. In other words, while a person may be a Green-Card Holder with only $2 million in the United States, he may have $15 million abroad, and therefore his estate may be subject to several million dollars worth of estate tax at his time of passing.
As such, since that $15 million that he received abroad may be the result of a foreign person gifting him that money (or as a result of an inheritance), the IRS may have never learned about the money, unless the individual had reported the receipt of the gifts during the year he or she received gifts by way of having to file a form 3520 (noting, if a foreign person gifts money to a US person into their foreign account, it still must be reported on a form 3520). The mere fact that the foreign person gifted the money into a foreign account does not exempt the US person from having to file the form)
As provided by the IRS: Section 6677. A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause).
Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable):
– 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.
– 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.
– 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information.
Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if the foreign trust (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c) and the Instructions for Form 3520-A.
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
FBAR & FATCA
In addition, if the gift was put into a foreign account or used to purchase Foreign Stocks, Securities, or Funds that exceeds the threshold requirements for reporting, the individual may also have to file an FBAR form, Form 8938, and/or Form 8621.
The failure to file these forms may result in significantly high fines and penalties that far outweigh what appears to be a mere failure to report.
Compliance Through IRS Offshore Disclosure
When a person is out of compliance, one of the fastest and most effective ways to get back into compliance is by submitting to the IRS offshore voluntary disclosure program.
Want to Learn More About IRS Offshore Disclosure?
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.