Foreign Gift Reporting, Penalties & Form 3520

Foreign Gift Reporting & Penalties

Form 3520 is used to report the existence of a gift, trust, or inheritance received from foreign persons.

Many U.S. persons may not be aware of their requirement to file a Form 3520 because they have no income or have no tax return filing requirements. Regardless, the IRS is aggressively enforcing compliance with foreign gift reporting.

You might be unsure whether you are required to file a Form 3520, or you might be unsure how to properly report a gift from a previous year. We want to summarize important information about how to report foreign gifts and how to avoid or resolve penalties from failing to report a foreign gift from a previous year.

What is a Foreign Gift for Purposes of Reporting Foreign Gifts?

A foreign gift is any amount received from a foreign person that the recipient treats as a gift and excludes from gross income. Foreign gifts do not include amounts paid for qualified tuition or medical payments.

Who is a Foreign Person for Purposes of Reporting Foreign Gifts?

A foreign person includes:

• Nonresident alien individual
• Foreign corporation
• Partnership
• Estate
• Domestic trust that is treated as owned by a foreign person

What are the Thresholds for Purposes of Reporting a Foreign Gift?

When determining the reporting thresholds, you must aggregate gifts received from related parties. A person is related to another person if the relationship between them would result in a disallowance of losses under section 267(b).

For gifts from a nonresident alien or foreign estate you are required to report the gift when the gifts collectively exceed $100,000 during the taxable year.  Further, if the gifts exceed $100,000, you must individually identify each gift in excess of $5,000.

For gifts from foreign corporations or foreign partnerships, you are required to report the gifts if the gifts from all entities collectively exceed $16,388 for 2019. You must individually identify each gift and the identity of the donor.

When Do You Need to File a Form 3520?

File Form 3520 separately from your income tax return. The due date for a U.S. person to file a Form 3520 is April 15th.  The due date for a U.S. citizen or resident who lives outside the United States and Puerto Rico or an individual in the military or naval service on duty outside the United States and Puerto Rico, is June 15th.

Common Examples of Individuals with Foreign Gift Reporting Requirements:

1. You are a resident alien or a U.S. citizen and your foreign parents or relatives deposit more than $100,000 collectively in your foreign or U.S. account during the taxable year.
2. You are a resident alien or a U.S. citizen and a foreign corporation deposits more than $16,388 in your foreign or U.S. account during the taxable year.

Penalties for Failure to File Part IV of Form 3520

If Part IV of Form 3520 is filed late, incomplete, or incorrect, the IRS may determine the income tax consequences of the foreign gift.  You may receive a penalty equal to five percent of the value of the gift for each month the gift is not reported, not exceeding 25 percent of the gift. In limited cases the IRS will waive the penalty if you show that you have reasonable cause for the failure to timely or accurately file.

We Can Help You Resolve and Avoid Non-Compliance with Foreign Gift Reporting Requirements

One of the many ways we can assist you is through streamlined filing compliance procedures. Streamlined filing compliance procedures can provide taxpayers who did not willfully fail to report a foreign gift with:

• a streamlined procedure for filing amended or delinquent returns,
• terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and
• terms for resolving their tax and penalty obligations.

We can also assist you through the Voluntary Disclosure Practice. If you have willfully failed to report a foreign gift, submitting a voluntary disclosure can resolve your non-compliance and limit your exposure to criminal prosecution.

Contact our international tax attorneys for a consultation by clicking here to schedule a meeting or by calling us at (410) 497-5947 to get started today.