IRS Form 3520 and foreign inheritances and gifts

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Form 3520 is officially the 'Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts'.

There are four sections to the form:

Part I -Transfers by U.S. Persons to a Foreign Trust During the Current Tax Year
Part II—U.S. Owner of a Foreign Trust
Part III—Distributions to a U.S. Person From a Foreign Trust During the Current Tax Year
Part IV—U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons

In this video we focus on Part IV which affects US persons who, during the current tax year, received:

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 $15,601 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

Form 3520 is just that -- a reporting requirement -- not a tax. The IRS doesn't want your money (yet), but would like to know exactly where your money is! Some people incorrectly assume that if no tax is due on their inheritance, then they don't have to file Form 3520.

Form 3520 is due on the date your income tax return is due (including extensions), and a separate form must be filled out for transactions with each foreign trust.

The Penalties:

If not filed, or if the information is incomplete or incorrect. The initial penalty:

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.

No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

The time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported.