Common Form 3520 Mistakes to Avoid

Common Form 3520 Mistakes to Avoid

Common Form 3520 Mistakes to Avoid

Common Form 3520 Mistakes to Avoid: One of the most dangerous international information reporting forms for US Persons is one that for most people has nothing to do with tax. The form 3520 is used to report a large gift from a foreign person (individual or entity) and trust distributions. Oftentimes, there is no tax consequences associated with the form 3520 filing. Rather, it is an informational return used to report the transaction to the IRS. The problem is that due to the fact that the penalties for noncompliance can be staggeringly high (25% value of the gift), and oftentimes these penalties are automatically assessed — it is important to try to get it right (if possible) at the outset.

5 Common Form 3520 Mistakes to Avoid

Here are 5 common issues with filing Form 3520:

Individual Gift Person vs Conduit on Form 3520

This is a very common and preventable problem. In some countries, there are currency restrictions which prevents the amount of currency a foreign person can transfer out of the country to the United States. In a common example, an adult child resides in the United States and a foreign nonresident parent wants to transfer a significant sum of money to the US person so that the US person can purchase a home. Instead of transferring the money themselves, the parents have to call on 20 of their closest friends and relatives to each transfer $50,000 in order to circumvent the country’s currency restrictions. Even though the transfers came from 20 (possibly unrelated) different people — the gift itself came from the parents — and therefore should be reported on form 3520.

Form 3520 Multiple Transactions

When a gift comes from a foreign individual, the U.S. person recipient must report the gift when the total value of the gift exceeds $100,000 in a single transaction — or series of transactions — in the same year. For example, if a person receives $10,000 a month from a foreign person in each of the 12 months in the same tax year — they have exceeded the $100,000 threshold and form 3520 should be filed.

Reduced Threshold for Gifts from Foreign Entities

A gift from a foreign person includes more than just individuals — it also includes entities. And, the threshold for reporting a gift received from a foreign entity is significantly lower than it is for receiving a gift from a foreign individual. This is important for two main reasons:

  • If the gift is less than $100,000, it may be better to receive the gift directly from a foreign individual in order to avoid reporting to the IRS; and
  • The reporting information required to be disclosed when receiving a gift from a foreign entity is significantly more intrusive than the personal information that is required to be provided to the IRS when receiving a gift from a foreign individual.

No Threshold for Foreign Trust Distributions

While there are 3520 filing threshold requirements when receiving a gift from a foreign individual or foreign entity  — there is no threshold if it is a trust distribution. Therefore, when a US person receives a distribution from a foreign trust  –even if it is a minimal amount — it is still supposed to be reported on form 3520.

Filing Late with No Reasonable Cause Statement

In recent year, the Internal Revenue Service has been aggressively enforcing form 3520 compliance. When the form is filed late,  it is not uncommon for the IRS to issue automatic assessed penalties  against the taxpayer — and if enough time has passed, it could equal 25% value of the gift.

When a well-written and persuasive reasonable cause statement is submitted with the late form, it may serve to avoid penalties for the taxpayer. And, even if it doesn’t avoid penalties at the outset — it sets the tone for the appeal (and future penalty disputes if necessary) in that the taxpayer has now shown from the outset that they have reasonable cause (presuming reasonable cause exists).

Common Form 3520 Mistakes Can be Avoided

In conclusion, while the form 3520 is not the most complicated international reporting form, there are several nuances that make the form much more difficult than it needs to be. It is important that the US person understands where the gift came from, the total value of gifts, and who was the person who actually gave the gift (even if it is not the person who actually transferred the money). If the form is being filed late, the filer should always include a detailed reasonable cause statement to support a penalty waiver or abatement.

Form 3520 Inheritance Tax Specialist Team

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.

Contact our firm today for assistance with getting compliant.