Taxation on Foreign Inheritances and IRS Form 3520
by: Claudine Gindel
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
Today we'll focus on Part IV. This part affects US persons who receive a foreign inheritance or gift, or more specifically 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 a reporting requirement --- not a tax. The IRS doesn't want your money, 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. This is an incorrect, and potentially very costly, assumption.
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.
Form 3520 Penalties
There are stiff penalties that can be imposed on you if you do not file, or if the information in incomplete or incorrect. BUT! For the penalties to be imposed, the IRS must prove that the failure to comply was willful neglect. You must be able to demonstrate that the failure to comply was due to reasonable cause.
The initial penalty for willfully not filing your Form 3520 is equal to the greater of $10,000 or 35% of the gross value of the property transferred or distributions received.
'Additional penalties' can also be assessed if the non-compliance continues after the IRS mails a notice of failure to comply with the required reporting. I could not find exactly what these 'additional penalties' are anywhere on the IRS website.
The IRS clock keeps ticking...
If you do not meet your Form 3520 reporting requirement, the time for assessment on any of your tax forms stays open forever. This means the IRS can go as far back in time as they'd like and assess even your Form 1040. If you do decide to meet the requirement and file the form eventually, the assessment date won't expire for another 3 years after that.
If you realize you should have filed a Form 3520, or have other international tax issues, contact us. We can help. Call us at 888-727-8796 or email firstname.lastname@example.org.