You just received a substantial gift from your aunt in Italy, or perhaps you’ve inherited property from a grandparent in Germany. While these financial windfalls might seem like purely positive events, they come with specific U.S. tax reporting obligations. If you’ve received foreign gifts, inherited property from non-U.S. persons, or have connections to foreign trusts, you’ll likely need to file IRS Form 3520. For those unfamiliar with Form 3520, this comprehensive guide is designed to help you understand your filing obligations, avoid severe penalties for non-compliance, and ensure full compliance with U.S. tax laws.

What Is IRS Form 3520?

IRS Form 3520 is an informational tax form that U.S. persons must file to report certain transactions with foreign trusts and the receipt of large gifts or bequests from foreign sources. Unlike income tax forms, as it relates to foreign gifts and bequests, Form 3520 doesn’t calculate tax owed but instead discloses specific foreign transactions to the IRS for monitoring compliance with U.S. tax laws.

This form has a broader reach than many taxpayers realize. Its formal title—”Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”—hints at its dual purpose. Not only does it track transactions with foreign trusts, but it also monitors substantial gifts received from foreign individuals, estates, corporations, and partnerships.

As an informational return, Form 3520 is filed separately from your regular income tax return. Most consumer tax preparation software doesn’t fully support it, and due to its specialized nature, it often requires separate preparation and filing, potentially with professional assistance.

Who Must File Form 3520

The filing requirement applies to “U.S. persons,” which includes U.S. citizens, resident aliens, and domestic entities such as corporations, partnerships, and estates. Specifically, you must file Form 3520 if you:

Received gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate.
Received gifts valued at more than $19,570 (for 2024, adjusted annually for inflation) from foreign corporations or partnerships. (Check the IRS website for the current year’s threshold amount.)
Transferred property to a foreign trust, directly or indirectly.
Received a distribution from a foreign trust.
Are treated as the owner of any part of a foreign trust under the “grantor trust” rules.

Reporting Thresholds That Trigger Filing

The IRS has established specific monetary thresholds that trigger the Form 3520 filing requirement:

More than $100,000 from foreign individuals and estates during the tax year.
More than $19,570 (for 2024, adjusted annually for inflation) from foreign corporations or partnerships. (Check the IRS website for the current year’s threshold amount.)

When calculating these thresholds, you must aggregate all gifts received from foreign sources during the calendar year. For example, if you receive $60,000 from a foreign uncle and $50,000 from a foreign aunt in the same tax year, the total exceeds $100,000, triggering the filing requirement—even though no single gift was over the threshold.

Filing Deadlines and Extension Options

Form 3520 is due on the same date as your personal income tax return (Form 1040), typically April 15th for most taxpayers. If you live outside the United States, you receive an automatic two-month extension until June 15th.

If you request an extension for your regular tax return using Form 4868, this also extends the due date for Form 3520 to October 15th. Beware of significant penalties for late filing.

As of the most recent tax year, Form 3520 generally cannot be filed electronically and must be submitted on paper. The completed form must be printed, signed, and mailed to (verify annually by reviewing the forms instructions):

Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409

Step-by-Step Guide to Completing Form 3520

The form is divided into several parts, each addressing different types of transactions:

Part I: Transfers to Foreign Trusts
For U.S. persons who created or transferred property to a foreign trust.

Part II: Foreign Trust Ownership
For those considered owners of any portion of a foreign trust under the grantor trust rules.

Part III: Distributions from Foreign Trusts
For reporting distributions received from a foreign trust, including loans and uncompensated use of trust property.

Part IV: Foreign Gifts and Bequests
For reporting gifts or bequests from foreign sources. You’ll need to indicate:
– The date you received the gift (column a).
– A description of what was received (column b).
– The fair market value of the property (column c).

For inheritances, report based on when you legally took ownership—either the date of death or the date of the actual transfer of property. When in doubt, report on the date of death to avoid potential late-filing penalties. Consult a qualified tax professional when making this determination.

Documentation Requirements

Maintain these records for at least three years after filing:

Statements showing the transfer of funds or assets.
Appraisals or valuation documents for non-cash assets.
Legal documents relating to trusts.
Documentation of your relationship to the foreign donor or trust.
Bank statements showing receipt of foreign gifts.
Currency exchange rate information for the transaction date.

When dealing with foreign currency, convert all amounts to U.S. dollars using the exchange rate in effect on the date of the transaction. While you don’t need to attach supporting documentation to your Form 3520, keeping comprehensive records is vital for defending your filing in case of an IRS inquiry.

Substantial Penalties for Non-Compliance

The penalties for failing to file Form 3520 when required can be severe:

For unreported gifts and bequests: 5% of the gift’s value per month, up to a maximum of 25%.
For unreported distributions from foreign trusts: 35% of the gross value of the distribution.
For failure to report ownership of a foreign trust: 5% of the trust assets deemed owned.

These penalties apply per form, per year, and can quickly accumulate. For example, a $200,000 unreported foreign inheritance could result in a $50,000 penalty (25% of the value).

The IRS may waive penalties if you can demonstrate “reasonable cause” for the failure to file, but the standard is high—typically requiring circumstances beyond your control that prevented timely filing despite exercising ordinary business care.

If you discover that you have missed the Form 3520 filing deadline, you should promptly consult with a qualified tax attorney to discuss your options to come into compliance and potentially avoid significant penalties for a delinquent Form 3520 filing. These options may include:

Delinquent International Information Return Submission Procedures
These procedures are for taxpayers who have identified the need to file delinquent international information returns who are not under civil examination or criminal investigation and have not been contracted about the delinquent information returns.
- Note that penalties may be assessed in accordance with existing procedures and careful consideration should be given to evaluating the proper compliance option right for you.
Streamlined Filing Compliance Procedures
For taxpayers whose non-compliance was non-willful, these procedures offer a way to file delinquent forms 3520 and other international information returns and amended income tax returns (if necessary) with reduced penalties. There are two versions:
- Streamlined Foreign Offshore Procedures: For U.S. taxpayers residing outside the U.S., with no penalties assessed.
- Streamlined Domestic Offshore Procedures: For U.S. taxpayers residing in the U.S., with a 5% miscellaneous offshore penalty based on the highest year-end aggregate value of foreign financial assets during the disclosure period (if any).
Voluntary Disclosure Practice
For taxpayers with potentially willful violations who want to avoid criminal prosecution, the IRS offers the Voluntary Disclosure Practice. This doesn’t guarantee immunity from prosecution but offers a path to resolution for certain taxpayers with potentially reduced penalties compared to what might result from an investigation.

Strategies to Avoid Penalties

Consider these strategies to maintain proper reporting:

Consult with a international tax lawyer experienced in international tax reporting.
Calendar all filing deadlines for both standard and extended due dates.
Keep comprehensive records of all foreign transactions.
File on time, even if some minor details are unavailable. Include a statement noting any information you’re still gathering, and file an amended return once you have complete information. Work with a qualified professional if taking this route.
Consider possible voluntary remediation procedures if you’ve failed to file in previous years.
Request penalty abatement if you have reasonable cause for failure to file timely.
Consider filing an appeal in response to a penalty assessment.

As it relates to foreign gift or inheritance reporting, since the penalties for non-filing accumulate at a rate of 5% per month, up to 25% of the gift or inheritance, catching the filing non-compliance as early as possible, may reduce the ultimate penalties the taxpayer faces for failing to timely file Form 3520.

Special Considerations for Business Owners

Business owners face additional complexities:

The structure of your business (sole proprietorship, partnership, corporation) affects how foreign gifts are reported.
Contributions from foreign sources can complicate and potentially implicate Form 3520 obligations.

For closely held businesses with international connections, these reporting requirements add another layer of compliance complexity that should be addressed in your overall business planning. For expert guidance, consider consulting an international tax attorney.

Related IRS Forms and Requirements

Form 3520 exists within a broader framework of international information reporting:

Form 3520-A: Annual information return filed by foreign trusts with U.S. owners.
FinCEN Form 114 (FBAR): Reports foreign financial accounts exceeding $10,000.
Form 8938: Reports foreign financial assets under FATCA requirements.
Form 8621: Reports investments in Passive Foreign Investment Companies.

Each form serves a distinct purpose, and filing one doesn’t eliminate the need to file others when required.

Common Scenarios and Solutions

Correcting a Past Failure to File Scenario:
You realized you should have filed Form 3520 for a foreign gift received two years ago.

Solution: Contact a tax professional immediately to evaluate your obligations and possible paths to correction your Form 3520 non-compliance.

By understanding these requirements and taking proactive steps, you can successfully navigate the complexities of Form 3520 reporting while minimizing the risk of costly penalties.

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Form 3520 Guide: How to Report Foreign Gifts and Avoid IRS Penalties