Form 3520 and Penalties: Who Must File and What if You File Late?

Form 3520 and Penalties: Who Must File and What if You File Late?

Form 3520

While the FBAR is the most common type of international information reporting form that U.S. persons with foreign accounts may have to file, there are several other types of IRS foreign tax forms that U.S. persons may have to file if they have foreign accounts and assets. This will be the first in a series of articles involving the other international reporting requirements that a Taxpayer may have — and Form 3520 is a good place to start. Form 3520 is one of the most common forms besides the FBAR is Form 3520. Form 3520 is an international reporting forum that requires US persons to report certain foreign gift and trust transactions, including:

      • Receiving a large gift from a foreign individual or entity,

      • Receiving a trust distribution from a foreign trust,

      • Having ownership of a foreign trust, and

      • other various transactions with a foreign trust

Let’s walk through the basics of Form 3520, along with the code sections that authorize the IRS reporting requirements:

What is Form 3520?

Form 3520 is an IRS form. Unlike a tax return form, the purpose of Form 3520 is not necessarily to report income or to compute tax calculations (although this can be the case when it involves trusts) but rather to report certain gifts and other trust-related transactions to the IRS. In other words, the form is an information reporting form. So, for example, if a US person receives a gift of $700,000 from a family member or related parties, the US person is required to report this information on Form 3520.

Who Must File Form 3520?

There are various scenarios in which a taxpayer may have to file Form 3520. Typically, it is reserved for US person individuals who either received a gift from a foreign person, received a trust distribution from a foreign trust, or have ownership or other certain transactions with a foreign trust. The threshold requirement for reporting foreign gifts from individuals/related parties is if the total value of the gifts exceeds $100,000 in the tax year. If the gift is from foreign entities, the numbers adjust for inflation and are currently around $18,000. There is no threshold requirement for reporting a foreign trust distribution so even de minimis distributions are reportable by US persons.

What Type of Transactions are Reported on Form 3520?

Depending on the type of transaction the person has would dictate what has to be reported on Form 3520 and the requirements can vary extensively. For example, if a person receives a gift from a foreign individual then they generally only have to report the date of the gift, the type of gift, and the value. Conversely, if a person has to report trust transactions it can get very detailed depending on the amount of the distribution, whether a beneficiary statement was distributed to the taxpayer and what was the total amount of distributions in prior years relative to the current year.

What Is the Threshold for Gifts From Foreign Individuals?

When a US person receives a gift from one foreign person individual and the value of the gift (or the total value of all the gifts from that same person in the same year) exceeds $100,000, the US person must file a Form 3520. (Keep in mind that if you have your mom in China give you 10 gifts of $99,000 from 10 different people, that is still considered coming from a single person and Form 3520 is required. See below regarding “Related Party Rules.”)

Threshold for Foreign Gifts From Foreign Entities

When a US person receives a gift from a foreign person entity and the value of the gift (or the total value of all the gifts from that same person in the same year) exceeds the current year adjusted amount for inflation, the US person must file a form 3520.

Threshold For Distributions from Foreign Trusts

There is no specific threshold when it comes to reporting trust distributions. Thus, if the US person receives any distribution from a foreign trust, then that distribution is reportable on Form 3520.

When is The Form Due?

In general, form 3520 is due at the same time that the Taxpayer’s tax return is due. Depending on whether a form 3520-A is also required may impact the due date.

Can You Apply for an Extension?

Yes, extensions for filing Form 3520 are available. If the taxpayer files an extension for their tax return, then the form 3520 goes on ext as well. Likewise, it is important to note that when it comes to Form 3520-A, taxpayers must file Form 7004 in order to apply for an extension as opposed to Form 4868 for Form 3520.

What if You File Late?

When a US person taxpayer files a late form 3520, they may be subject to extensive fines and penalties. If the taxpayer is able to show reasonable cause, then they may be able to have the penalty waived or avoided in the first place. There are various procedures that taxpayers can pursue in order to obtain a waiver of the penalty, including an appeal or Collection Due Process Hearing. Taxpayers may also pursue tax court or federal court if they are seeking to litigate the matter, but for federal court, it does require the taxpayer to make payment first.

What are there Penalties for Late Filing?

Typically, when it comes to foreign gifts which is the most common type of penalty under form 3520, the IRS can penalize the taxpayer 5% value of the value of the gift for a total penalty of 25%, which represents five months worth of penalty at 5%.

Form 3520 Penalty Avoidance, Abatement, and Amnesty

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.