Why You Can’t Hide Your Foreign Gift from the IRS

When it comes to foreign tax reporting, it’s very easy to end up in expensive trouble with the IRS if you received a foreign gift or foreign inheritance.

You might think the IRS doesn’t really care about property or cash you received from a long-lost relative or trust from overseas. And when you learn about IRS Form 3520 for reporting a foreign gift, bequest or inheritance of more than $100,000, you might think you can just skip filling it out — especially because you don’t actually have to pay taxes on the foreign gift even if you file the form.

But here’s the rub. While there is a chance the IRS won’t find out about your foreign gift, there is a significant possibility that they will. And if they do, and you failed to file Form 3520, you could be looking at really big penalties.

If you failed to file Form 3520, you can be slapped with 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.

With a gift of more than $100,000, that means a penalty that could be quite large — all because you didn’t report the gift in the first place.

If you’re ready to file Form 3520, read our primer on what to do here.

How Could the IRS Find Out About Your Foreign Gift or Inheritance?

As a foreign gift reporting expert, Tax Attorney Sammy Kim has helped many clients get big penalties removed when they failed to file IRS Form 3520 or they did not submit a timely filing.

Reaching out to a tax attorney to figure out what to do about Form 3520 might seem like a real hassle. But here are some reasons why your foreign gift or inheritance could be really tough to hide.

You transfer a lump sum of money from foreign bank accounts to your United States bank account. At first, the money you have been given might be sitting somewhere in a bank overseas. Or perhaps you were gifted a piece of property in another country. While it might be tougher for the IRS to find at first, what benefit does that foreign gift serve long term if you don’t eventually transfer it to the United States?

It is important to be aware that the government will find out when you transfer the funds or dispose of the property at some point and move the funds to a U.S. bank account.

Say, for example, you received a foreign gift larger than $100,000 in 2017 and you decide to transfer that money to your United States bank account in 2024. If you have not disclosed about this foreign asset to the IRS by then, you would have already missed filing Form 3520, as well as other foreign tax-related forms.

Also, it’s important to know that United States banks typically flag large sums of money transferred from overseas AND there is no time limit on the IRS imposing penalties for failing to file Form 3520. So, if the IRS does eventually catch your unreported foreign gift, you’re in trouble and could have big penalties to pay.

You sell the property you inherited overseas but never reported it. Let’s say you sell a house you inherited overseas. You will be required to pay capital gains tax and some local taxes to the foreign government.

The good news is that most foreign governments have a treaty with the U.S., so you can reduce or offset the capital gain tax paid on the house sale overseas and avoid being double taxed on that foreign income here in the United States. That requires filing a separate form to claim foreign tax credit on your tax returns.

But what if you haven’t reported foreign rental income you have been receiving from the inherited real estate? Now you’re in a big pickle, leaving yourself open to the IRS finding out about your unreported inheritance and unreported foreign income, and assessing taxes and penalties against you for failing to report it.

You have a foreign bank account you’ve reported and suddenly the balance rises. Let’s say you have been reporting your foreign bank each year as required. Your foreign bank account has a balance of $10,000 in one year and then suddenly has a balance of $300,000.

If you’re not earning money overseas, the most likely situation is that you received a foreign gift or inheritance — and then U.S. banks also flag such large transfers to the IRS. Different layers of disclosure from different sources expose your position to the IRS. With the IRS now utilizing AI and powerful search tools, you may be questioned or audited by the IRS about how that large sum of money landed there.

Tips for Avoiding Penalties if You Found Out About Form 3520 After the Deadline

The deadline for filing IRS Form 3520 is the same as your tax filing deadline. If you are filing on time, your deadline is generally April 15. If you file an extension, your deadline would be October 15.

If you’re late in learning about IRS Form 3520, an experienced tax attorney in the DMV area can help you avoid or reduce the significant penalties for failing to report on time.

In most cases, you are advised to use one of the IRS voluntary disclosure programs.

Also, if the deadline has passed and the IRS has NOT yet contacted you about it, you have a chance to file missing returns under the Delinquent International Information Return Procedures (‘Delinquent Procedure’) as soon as possible.

A skilled IRS tax attorney can help you draft a “reasonable cause” statement to attach to each informational return in the package. A good statement of facts is helpful.

Organizing supporting documents per the instructions of the Delinquent Procedure is a must. Notating appropriately on the face of the information return is required. If the voluntary disclosure submission has been reviewed by the International Unit in the IRS and they agree with the taxpayer’s position, penalties will NOT be assessed when they process your return.

If the IRS mails you a Notice of Penalty Charge, you have 30 days to appeal. How you reply to the notice will impact whether you can get your penalties abated.

Get Help from A Tax Attorney with Experience Handling IRS Form 3520 Cases

Attorney Sammy Kim regularly helps her clients get big penalties removed after they have filed Form 3520 late or failed to file it at all.

If you need help with any issues related to IRS Form 3520 and reporting a foreign gift or inheritance, talk to an experience tax attorney in Northern Virginia now.