What Are the Penalties for Not Filling Out IRS Form 3520?

Beneficiaries of offshore trusts or recipients of gifts from foreign individuals or estates can struggle when trying to understand the tax ramifications of notifying the IRS.  There are several filing requirements that are relatively new and not well understood by the general public.  The main requirement is a submission of IRS Form 3520.

Failure to file IRS Form 3520 comes with severe consequences.  The penalties for a failure to file IRS Form 3520 range in size depending on the nature of the income and its source.  The guidelines also account for the total value of the foreign income at stake in determining the ultimate penalty.

If you believe that you may need to submit IRS Form 3520 or feel that you may have made a mistake and not filed in time, it is important that you act quickly.  Your first step should be to speak with an experienced international tax professional.  To get in contact with US Tax Help, visit the Client Portal on our website or call us at (541) 362-9127.

What is IRS Form 3520?

When a U.S. taxpayer becomes the beneficiary of a foreign trust or receives income from a foreign inheritance or gift, the government requires that the taxpayer submit IRS Form 3520, or Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.  One key difference between IRS Form 3520 and other IRS filings is that IRS Form 3520 is an information return.  Since it is not a traditional tax return, IRS Form 3520 does not require any accompanying tax payment upon submission.

If you have questions about IRS for 3520 and the circumstances under which you may need to submit one, speak to the experienced international tax experts at US Tax Help.

What Are the Penalties for Not Filing IRS Form 3520?

The penalties for failing to file IRS Form 3520 in a correct and timely manner are laid out primarily in the Internal Revenue Code’s § 6677.

Generally, the penalty imposed will be the greater of either $10,000 or a specified percentage of the income derived improperly.  The percentages are determined as such:

  • 35% of the gross value of any property or distributions transferred to or from a foreign trust
  • 5% of the gross value of a specific allotment of asset(s) held in foreign trust that are identified as being owned by a U.S. citizen or taxpayer
  • 25% of the gross value of any gift or inheritance over a value of $100,000 received from a foreign person or estate

Additionally, a taxpayer who is found to be in violation of the tax laws on reporting foreign trusts may face additional penalties depending on their having validly submitted an IRS Form 3520-A.  If there is a failure to file both forms, the additional penalty articulated by the IRS is 5% of the gross assets held in the foreign trust.

IRS Form 3520-A is less frequently required and is usually only sought from individuals who oversee foreign trusts that have identified U.S. taxpayer beneficiaries.

How To Avoid Penalties for Not Filling Out IRS Form 3520

The myriad consequences of failing to navigate the foreign trust disclosure process appropriately are severe and should be avoided at all costs.  Here are a couple of strategies to keep in mind if you think that you may be subjected to these specific disclosure requirements.

File IRS Form 3520 Early

There is no way to report the existence of income from a foreign trust or inheritance too early.  The deadline for making a timely disclosure to the IRS is the same as the taxpayer’s upcoming income tax filing deadline, which for most Americans is April 15 of each year.  In the eyes of the IRS, filing IRS Form 3520 too late is no different than not filing at all.

Using the “Reasonable Cause” Defense

The law gives the taxpayer a defense against penalties for a failure to file which is due to reasonable cause (as opposed to willful neglect).  Establishing a reasonable cause defense is complex, but in all scenarios requires the taxpayer to show that they have been at least mildly active in attempting to be compliant with the tax code.  One way to demonstrate this is by speaking to experienced international tax professionals such as those at US Tax Help.

Seek Professional Help

If you’ve ever filled out a government form before, you know that they aren’t always the most user-friendly documents.  The IRS will treat every mistake on IRS Form 3520 initially as a failure to file the document entirely.  It’s always better to be right the first time than to have to go through the painstaking process of mending mistakes.  Let the diligent international tax experts at US Tax Help take you through the process from beginning to end.  We will ensure that everything moves as seamlessly as possible.

Get Help from Our Expat Tax Pros

The best first step for your taxpayer status is to get in touch with the international tax professionals at US Tax Help.  Ted has been working with clients like you on IRS Form 3520 matters for over 30 years.  To speak with the team at US Tax Help, visit our Client Portal on our site or give us a call at (541) 362-9127.