What You Need to Know About Form 3520 for Gifts and Inheritances

Form 3520 is a document for U.S. taxpayers who receive gifts or inheritances from foreign sources, ensuring compliance with the IRS’s reporting requirements. Understanding this form helps avoid penalties and ensures accurate tax filings.

Distinguishing Between Gift and Inheritance

Understanding the difference between gifts and inheritances is critical for U.S. taxpayers managing foreign assets. A gift is a voluntary transfer of property or money without something of equal value in return. An inheritance, on the other hand, is the transfer of assets after the death of the original owner, typically dictated by a will or intestacy laws.

The IRS treats these transfers differently, affecting reporting obligations. Gifts from foreign individuals exceeding $100,000 in a year must be reported on Form 3520, with penalties for noncompliance. Inheritances don’t have a specific threshold for Form 3520 but may still require disclosure depending on the assets involved.

Tax implications vary as well. Gifts are generally not subject to income tax but may involve gift tax considerations for U.S. donors. Inheritances are usually not taxable income for recipients but could be subject to estate taxes depending on the size of the estate and the laws in the decedent’s country.

Filing Thresholds

Filing thresholds for Form 3520 are key to IRS compliance. U.S. taxpayers must report gifts from non-U.S. individuals or foreign estates if they exceed $100,000 in a calendar year. Tracking foreign receipts throughout the year is essential to avoid inadvertent noncompliance.

Gifts from foreign corporations or partnerships have a lower threshold. For 2024, reporting is required if the combined value of gifts from such entities exceeds $17,339. Taxpayers should maintain thorough records of all foreign gifts and inheritances to ensure accurate filings and prepare for potential IRS inquiries.

Coordination With Other Reporting Obligations

Form 3520 is part of a larger IRS framework for overseeing international financial transactions. Taxpayers must also account for Form 8938, which reports specified foreign financial assets exceeding certain thresholds. For example, a single U.S. taxpayer must file Form 8938 if the total value of foreign assets surpasses $50,000 on the last day of the tax year or $75,000 at any point during the year.

Additionally, the Foreign Bank Account Report (FBAR) requires U.S. persons to report foreign financial accounts exceeding $10,000 at any time during the year. While Form 3520 addresses gifts and inheritances, FBAR focuses on financial accounts. Understanding the distinctions and overlaps between these forms is essential to avoid penalties, emphasizing the importance of meticulous record-keeping and timely submissions.

Penalties

The IRS enforces penalties to ensure compliance with reporting requirements for foreign financial activities. Failing to file Form 3520, or filing it inaccurately or late, can result in steep penalties. The initial penalty is the greater of $10,000 or 35% of the foreign gift or bequest’s gross value.

If noncompliance continues after receiving an IRS notice, additional penalties of $10,000 accrue for each 30-day period (or fraction thereof) beyond the 90-day notice period. This highlights the importance of addressing discrepancies promptly to avoid escalating financial consequences.

Amending or Late Submissions

Taxpayers who fail to file Form 3520 on time or discover errors in a submitted form can address these issues through late submissions or amendments. Acting quickly is critical to minimizing penalties and scrutiny.

For late filings, taxpayers should submit Form 3520 as soon as possible, including a detailed reasonable cause statement explaining the delay. This statement should provide evidence, such as unforeseen circumstances or reliance on incorrect professional advice. While penalty waivers are not guaranteed, a well-documented explanation can increase the likelihood of leniency. Supporting documentation, such as bank statements, should be included to substantiate the filing.

To amend a previously filed Form 3520, taxpayers must mark the form as “Amended” and clearly outline the changes made. An explanation should accompany the amendments, detailing the reason for the corrections. For example, if an underreported gift value was due to an exchange rate error, the amended form should explain the updated valuation method. Accurate amendments demonstrate good faith and reduce the likelihood of extended IRS inquiries or audits.