IRS FORM 3520: GIFTS FROM A FOREIGN PERSON AND FOREIGN TRUSTS
If you are a U.S. person who received a foreign gift of money or other property, you may need to report these gifts on Form 3520. This form is known as the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers frequently seek guidance from their tax attorney about these obligations and how to avoid IRS penalties. IRS Form 3520 is often required in conjunction with FBARs and international tax compliance. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 if it is required. If you have failed to file form 3520, you may need to enter the offshore voluntary disclosure program or the streamlined offshore filing compliance program.
General Rule: Foreign Gifts
In general, a foreign gift is money or other property received by a “U.S. person” from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” includes a nonresident alien individual, foreign corporation, partnership or estate.
A “U.S. person” for tax purpose includes any of the following:
- A U.S. Citizen, which is anyone with a U.S. passport;
- A green card holder (see the IRS Alien-Residency—Green-Card test);
- A U.S. resident for tax purposes, which is commonly defined as someone who spends more than 183 days in the US under the Substantial Presence Test. A U.S. resident for tax purposes is also known as a resident alien (see the IRS U.S. Resident test).
The IRS may attempt to re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be reported as gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons.
The authority for Form 3520 is contained in IRC section 6048. You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year one or more of the following applies:
- You are the responsible party for reporting a reportable event that occurred during the current tax year, or you transferred property (including cash) to a foreign trust in exchange for an obligation. Responsible party, reportable event, and qualified obligation are defined later.
- You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.
- You are a U.S. person who received (directly or indirectly) a distribution from a foreign grantor or nongrantor trust (including the uncompensated use of trust property) during the current tax year or you (or a U.S. person related to you) received a loan (including an extension of credit) from a foreign trust that could be treated as a distribution to a U.S. person.
- You are a U.S. person who, during the current tax year, received either:
- More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or
- More than $15,671 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
You must aggregate gifts received from related parties. For example, if a U.S. person receives $60,000 from nonresident alien A and $50,000 from nonresident alien B, and he or she knows or has reason to know that party A and B are related, the U.S. person must report the gifts because the total, when aggregated, is more than $100,000
Where to File Form 3520
File IRS Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year.
Mail Form 3520 to the following address:
Internal Revenue Service Center
P.O. Box 409101
Ogden, Utah 84409
If you don’t file a complete IRS Form 3520 by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported on Form 3520 will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).
Penalties for Failure to File Form 3520
You may be penalized if you do not file your IRS Form 3520 on time or if it is incomplete or inaccurate. An IRS examiner will review and determine whether the Form 3520 was timely filed or incomplete and inaccurate, and whether the failure to file was due to reasonable cause. If a penalty is determined, a CP notice is generated and sent to the taxpayer.
The Failure to file penalty is contained in IRC section 6677, and is initially the great of $10,000 or 35% of the gross reportable amount for IRC section 6048(a) and for IRC section 6048(c) failures. Additional penalties may 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. If you can demonstrate that the failure to comply was due to reasonable cause and not willful neglect, the penalties may be avoided.
HOW TO APPEAL A PENALTY ARISING FROM IRS FORM 3520
Taxpayers have post-assessment prepayment appeal rights. See I.R.M., pt. 188.8.131.52(1) (Dec. 18, 2015). Penalties can be considered in collection due process hearings. See I.R.M., pt. 184.108.40.206(15) (Dec. 18, 2015); see also Flume
v. Commissioner, T.C. Memo. 2017-21.
The IRS must issue a statutory notice of deficiency before assessing a penalty pursuant to section 6677 in certain situations:
- Income recharacterization under IRC § 6039F(c)(1)(A)
- Income from trust distributions under IRC § 6048(c)(2)
Foreign Trust and Gift Compliance
International tax compliance can be a very complex maze to navigate. A tax attorney can assist you with navigating the complex rules and regulations. When a taxpayer has an FBAR filing requirement, he or she might also have a requirement to file form 3520. In addition, if a taxpayer has noncompliance related to from 3520, he or she may want to enter the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures to avoid penalties. Contact a tax attorney to discuss your options. Disparte Tax Law can guide you through these complex filing requirements.