IRS Form 3520: Reporting Foreign Trusts and Receipt of Large Gifts or Inheritances
By Jason Kovan · July 4, 2023
What U.S. taxpayers should consider when a foreign trust, large gift, or inheritance enters the picture.
Two common reasons for filing
Form 3520 is generally associated with two broad reporting situations: certain transactions with foreign trusts and receipt of gifts or inheritances from foreign persons or entities above applicable thresholds.
The form is an information return. It does not replace the taxpayer’s income tax return, and a Form 3520 filing may be required even when the underlying transaction is not taxable income.
Foreign trust transactions
A taxpayer may need to report an ownership interest, a distribution, a transfer, or another transaction involving a foreign trust. The correct analysis depends on the trust documents, the taxpayer’s rights, and the movement of money or property during the year.
Gifts and inheritances
A foreign gift or inheritance should be reviewed with the donor’s identity, residency, relationship, date, and value in mind. Different rules can apply to gifts from a foreign individual, a foreign corporation, or a related party. Keep contemporaneous records rather than relying on memory at filing time.
Avoiding a missed filing
Start with a transaction timeline, collect the supporting statements, and compare the facts with the current IRS Form 3520 instructions. If the IRS has already sent a notice, preserve the envelope, notice number, and response deadline.