If you received a large gift or inheritance from family abroad, or you have any connection to a foreign trust, Form 3520 is the reporting form that most often trips up otherwise compliant taxpayers. The gift itself is usually not taxable, which is exactly why people fail to report it, and the penalty for that oversight can reach 25% of the amount received. This guide explains the three things Form 3520 covers, the reporting thresholds, the penalty structure, the recent IRS relief on gift penalties, and how to fix a missed filing.
What Is Form 3520 and What Does It Report?
Form 3520 is the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. It is an information return, it produces no tax on its own, but it is how the IRS tracks money and assets crossing into the United States from foreign trusts and foreign persons. U.S. persons (citizens, green card holders, residents, and domestic entities) use it to report three distinct situations.
Do You Owe Tax on a Foreign Gift or Inheritance?
Generally, no. A gift or inheritance you receive from a foreign person is not taxable income to you, and the U.S. does not impose gift or estate tax on the recipient of a foreign gift. The obligation is purely to report it on Form 3520 if it exceeds the threshold, so the IRS can confirm it is a genuine gift and not unreported income.
This is the crux of why Form 3520 is so commonly missed: a U.S. child who inherits $400,000 from a parent abroad, or who receives a $150,000 down-payment gift from family overseas, owes no tax, sees nothing to report on their 1040, and never learns that a separate information return was due, until a penalty notice arrives.
Foreign Gift Reporting Thresholds
Important- Gifts or bequests from a nonresident alien individual or a foreign estate: report on Form 3520 if the aggregate exceeds $100,000 during the tax year. Gifts from related foreign persons are aggregated.
- Gifts from foreign corporations or foreign partnerships: a much lower threshold, adjusted annually for inflation ($20,116 for 2025). These are also subject to recharacterization rules.
Once you cross the applicable threshold, you report the gifts in full, not merely the excess over the threshold. Gifts from a foreign person funneled through a U.S. intermediary or a foreign entity can still be treated as reportable.
What Are the Form 3520 Penalties?
The penalties differ sharply depending on whether the issue is a foreign gift or a foreign trust matter, and they are among the harshest in the Code for an information return.
Recent IRS Relief on Foreign Gift Penalties
2025 UpdateIn late 2024, the IRS announced it would stop automatically assessing penalties on late-filed Forms 3520 Part IV (foreign gifts and bequests) before reviewing any reasonable-cause statement attached to the filing. Previously, the IRS systematically issued automatic penalty notices, even on plainly non-taxable family gifts, forcing taxpayers into lengthy abatement fights.
This is a meaningful, taxpayer-favorable change, but two cautions apply: the underlying reporting requirement still exists, and the statutory penalties remain on the books for cases where reasonable cause is not established. The relief is about process, automatic assessment, not a repeal of the obligation. Attaching a clear reasonable-cause explanation to a late gift filing is more valuable than ever.
How Do Foreign Trusts Work Under Form 3520?
Foreign trusts are the more complex side of Form 3520, and they carry the 35% / $10,000 penalties. Three roles can each create a filing obligation.
The Three Foreign-Trust Triggers
- Transferor: a U.S. person who creates a foreign trust or transfers money or property to one reports the transfer in Part I.
- U.S. owner: a U.S. person treated as owning any portion of a foreign trust under the grantor-trust rules reports it in Part II, and the trust must file Form 3520-A (or the U.S. owner files a substitute Form 3520-A) to report the trust's income, distributions, and U.S. beneficiaries.
- Beneficiary: a U.S. person who receives a distribution from a foreign trust reports it in Part III, and may face the punitive throwback rules and an interest charge on accumulated distributions.
A "foreign trust" is broader than people expect. Some foreign retirement and savings arrangements are treated as foreign trusts for U.S. purposes, which historically created Form 3520 headaches, although the IRS has carved out relief for many tax-favored foreign retirement and education accounts under Revenue Procedure 2020-17. Whether a particular foreign arrangement is a reportable trust is a fact-specific question worth confirming before assuming relief applies.
How Does Form 3520 Fit With Your Other Foreign Filings?
Form 3520 is frequently one piece of a larger international compliance picture. The same facts that trigger it often trigger others:
- The FBAR (FinCEN Form 114) reports the foreign accounts that hold gifted or inherited funds.
- Form 8938 (FATCA) may report foreign financial assets, including certain foreign trust interests, above the threshold.
- Form 8621 reports any foreign mutual funds or PFICs received or held in a foreign trust.
- Form 5471 reports interests in foreign corporations, which sometimes hold the assets being gifted.
When a past Form 3520 was missed alongside unreported foreign income, the Streamlined Filing Compliance Procedures, the SDOP track for residents and the SFOP track for non-residents, are often the cleanest correction path and explicitly contemplate including Form 3520.
How Do You Fix a Missed Form 3520?
A missed Form 3520 is correctable, and the path depends on the facts.
- Late gift filing with reasonable cause. File the delinquent Form 3520 with a detailed reasonable-cause statement explaining why it was late (for example, no knowledge of the requirement on a non-taxable family gift). Given the IRS's 2024 change, automatic assessment should no longer precede review of that statement.
- Foreign-trust failures. Because the 35% penalties are larger, foreign-trust corrections deserve careful handling, often through the Delinquent International Information Return Submission Procedures with a reasonable-cause narrative.
- Missed alongside unreported income. If foreign income was also unreported and the conduct was non-willful, Streamlined (SDOP or SFOP) is usually the right umbrella, and Form 3520 is filed as part of that package.
As with all foreign-information failures, a quiet, unexplained late filing is the riskiest choice. A documented reasonable-cause position or a recognized program provides protection that silence does not.
Bottom Line
Form 3520 catches people precisely because the gift or inheritance behind it is usually not taxable, so there is nothing on the 1040 to prompt the filing, yet the penalty for missing it can reach 25% of a foreign gift or the greater of $10,000 or 35% for foreign-trust transactions. The recent IRS decision to stop auto-assessing gift penalties before reviewing reasonable cause is genuinely helpful, but the reporting obligation and the statutory penalties remain. The safe move is to identify the obligation up front and file a clean, well-documented return.
If you have received a foreign gift or inheritance, created or benefited from a foreign trust, or discovered a missed Form 3520 in a prior year, our international tax and estate and trust tax teams can determine what is reportable and prepare the filing with the right reasonable-cause support. Have questions about Form 3520 or foreign gifts? Contact TS CPA for a free consultation. We respond within the same day.