Are Incomplete Gifts or Inheritances Reported on Form 3520?
Is an Incomplete Gift or Inheritance Reported on Form 3520: A common question we receive regarding the reporting of Form 3520 to the IRS when receiving a large gift from a foreign person — is when do the reporting requirements kick in. Stated another way, at what point does the US Person have to actually report that they received the foreign gift. For example, what happens if the gift is the result of an incomplete gift or inheritance that sits in limbo for several years? is a protective form 3520 warranted?
Let’s review the basics of if an Incomplete Gift or Inheritance Reported on Form 3520.
Was the Gift Received?
Form 3520 requires US persons who receive gifts from foreign persons that are considered large gifts — to report the value of the gift on form 3520.
The instructions provide the following:
You are a U.S. person who, during the current tax year, received either:
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 $16,649 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
Did You Receive the Gift or Inheritance?
In order to have to file form 3520, a person has to receive a gift. Disregarding the distinction between Gifts and inheritance for a moment, from a baseline perspective — an inheritance is a type of gift, so that the receipt of the inheritance would be reportable unformed 3520.
BUT, if a Taxpayer never received the inheritance or it it sits in Limbo, then the Taxpayer presumably would not have to report it until they receive it — because what happens if they don’t receive it —
Peter expects to receive a $300,000 inheritance from family members India. The inheritance is going through the probate process in India (which can take many years) when a creditor comes along and determines that the decedent owed him $400,000 but is willing to settle for the $300,000.
Since David never received the inheritance, he never received the gift and presumably the 3520 would not be filed —
Timely Filing 3520 vs Untimely Filing
Sometimes, it may not hurt to file a protective form 3520 — presuming that the form is being filed timely.
If the protective filing is after the fact and the gift was not received — it may be opening a Pandora’s box to file a late form 3520 in a situation in which the form may not even be required.
Form 3520 Can Be More Complicated Than it Seems
In conclusion, while preparing the form 3520 in a situation in which the issue is a gift is not necessarily complicated from a “preparation” standpoint, determining whether the form should be filed is a much more complicated exercise. Sometimes it may help to file a protective form 3520 but not necessarily — so if you are considering the fact then you should speak with a Board Certified Tax Law Specialist to get a better understanding of the pros and cons.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.