Foreign Gift Reporting & The IRS: Do You Need to File Form 3520 & What Could Happen If You Don’t?
Believe it or not, you could land with a big IRS tax problem for something that didn’t even require you to pay taxes in the first place.
IRS Form 3520 is one of the more confusing tax forms out there. It’s used for reporting foreign gifts, bequests, or inheritances of more than $100,000.
Even though you don’t have to pay federal taxes in the U.S. on a foreign gift or inheritance, you do have to report it — or you could have to pay sizable penalties for failing to do so or for reporting it to the IRS past the stated deadline.
Let’s say you live in the U.S. and pay taxes in the U.S. You might be doing everything right, working with your accountant to pay your taxes accurately and on time.
But, if you receive cash or assets from your parents, relatives, or another party who lives overseas, you might suddenly be required to submit Form 3520, depending on the amount of the gift. And sometimes the recipient of the gift doesn’t even know about the foreign gift for a while, let alone the reporting rules!
If you failed to file Form 3520 or filed late, it can really leave you in a tough and expensive situation.
Failing to file Form 3520 carries a penalty of 5% of the value of the unreported gift for each month that passes after its due date. The maximum penalty is 25% of the amount of the gift. The form is typically due on your tax filing deadline.
Whew. For a big inheritance, that can equal significant dollars, and no one wants to pay a penalty of any size.
But there are some slivers of good news.
For one thing, it’s better to file late than not at all. So, if you find out that you need to file Form 3520 after the deadline has passed — but you have not been contacted by the IRS about it yet — you should file your delinquent international information return through normal filing procedures.
A skilled IRS lawyer who understands foreign gift reporting can also help you draft something known as a “reasonable cause” statement to go with the document. It is important to be aware that penalties may be assessed while your return is being processed.
Attorney Sammy Kim has years of experience helping clients have massive penalties erased after they either filed Form 3520 too late or failed to file it at all. If you need help appealing a penalty due to a foreign gift or inheritance, talk to a foreign gift reporting expert now.
Real-Life Examples of Clients Who Had Foreign Gift Tax Reporting Problems
Are you required to file IRS Form 3520? How can you figure that out?
The easiest way to think about whether you might be required to file IRS Form 3520 is by looking at examples taxpayers who have run into trouble with this important foreign gift tax reporting form.
Here are two example scenarios and how they were resolved with the help of a foreign gift reporting tax attorney:
Jake was adopted and moved to the U.S. in 2004 — he missed the deadline for filing IRS Form 3520 and was slapped with a $375,000 penalty. Jake grew up in the U.S., went to college, and got a job in the U.S. In 2022, informed by his biological family abroad that his biological grandparent passed away and left him real estate valued at $1.5 million. In order for his family members overseas to sell the real estate while Jake remained in the U.S., he was asked to sign and notarize Power of Attorney forms. Concerned that there might be something he was missing, he researched whether he was subject to any additional filing requirements. That’s when he realized that the deadline for filing Form 3520 had already passed — it should have been filed for the tax year when the inheritance took place in 2017.
In 2022, Jake’s CPA advised him to file the late Form 3520 and said he could take care of any penalty through the abatement process. Jake filed the form four years late and soon received a Notice of Penalty Charge, imposing a whopping 25% penalty ($375,000) of the gifted value of the real estate ($1.5 million).
His CPA filed a penalty abatement request, but the IRS denied it. Jake then contacted the Law Offices of Sammy Kim and submitted a carefully organized appeal package. After multiple follow-ups and the submission of requested documents and information, Jake received a 100% abatement (i.e., removal) of the imposed penalty. Jake’s $375,000 penalty became zero.
Harold received a foreign gift and was panicked when he learned about Form 3520 after the filing deadline — he knew he would owe a big penalty and didn’t know what to do. He immigrated to the U.S. decades ago, with siblings who remained abroad. In 2019, he inherited real estate from his family in China.
When he received the real estate, he asked his accountant for any advice related to filing and paying taxes. The accountant did not mention Form 3520. Recently, Harold came across Attorney Sammy Kim’s YouTube video talking about foreign gift reporting to the IRS, even when no money has been transferred to your account. Even though he was scared about the huge penalty, he reached out. The attorney explained that he could submit the late filing with a reasonable cause statement under the specific program called the Delinquent Informational Return Submission Procedure, and he decided to carefully file the late Form 3520 under the Procedure. The IRS processed the form without any penalty, and the matter was closed with no issue.
If You Failed to File Form 3520 Or Filed Late, An IRS Tax Lawyer Can Help Reduce or Remove Penalties
If you already filed a late Form 3520 like Jake, you might have received a Notice of [Penalty] Charge from the IRS. With such a notice, you have 30 days to appeal. If you missed the 30-day window, you need to speak to a Form 3520 expert.
If you are more like Harold (i.e., you are late, but have not filed Form 3520 yet), you might be able to get your late Form 3520 processed without any penalties being assessed in the first place.
In either case, find a tax attorney that understands the details of IRS Form 3520 and knows how to negotiate with the IRS to abate penalties. Filing an appeal over foreign gift tax reporting comes with lots of detailed requirements.
This type of legal challenge is complicated. It requires winning an argument that you failed to file the form or filed late due to “reasonable cause” — and not “willful neglect.”
You will need to prove that after you learned about the requirement to file Form 3520, you did everything you possible could. This sort of appeal also requires any documentation to prove what you’re saying is true.
Attorney Sammy Kim represents clients who didn’t even know about foreign tax reporting requirements and has persuaded the IRS to completely remove penalties for her taxpayer clients.
If you are having problems related to IRS Form 3520, consult with a tax attorney now.
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