Who is Required to File Form 3520? What are the Penalties for Failing to File Form 3520?

IRS Form 3520 is used for two separate, and distinct purposes. First, it is used to report gifts from foreign persons. Second, it is used to report certain transactions with foreign trusts. We only discuss foreign gift reporting in this post.

Let’s start with gifts from foreign persons. U.S. persons are required to report gifts they receive from a nonresident alien individual, if the gift is in excess of $100,000 during the tax year. A similar rule applies if the gift is from a foreign estate, in another words, an inheritance. If the gift is received from a foreign partnership or foreign corporation then the amount that triggers reporting is much lower. For 2021 that amount was $16,815. It is indexed annually for inflation.

Note that you must add up multiple gifts from the same person during the taxable year. Not only that you must include gifts from persons related to the non-resident alien individual when calculating the amount of the gift.

The Form 3520 is due on the same day as the Form 1040 is due. If an extension is granted for the 1040 that will also extend the due date of the Form 3520. Although the due date for the Form 3520 is the same as the due date for the Form 1040 it is not attached to the Form 1040. Instead it is filed at the following address:

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409

Tax penalties for failure to file Form 3520 to report a gift are onerous. It is calculated under Internal Revenue Code Section 6039F and is equal to 5% of the amount of the gift, for each month, or part of a month for which the failure to file Form 3520 continues. The maximum penalty is 25% of the gift. In addition, the IRS may treat the amount as income rather than a tax-free gift. Also, the statute of limitations on assessment of additional tax on the Form 1040 for the year remains open until three years after the Form 3520 is filed. Thus, failure to file Form 3520 can permanently leave open the statute of limitations on assessment.

You can be relieved of the penalty if you can establish that there was reasonable cause for the failure to file, and that the failure to file was not due to willful neglect. The IRS points out in its instructions that a foreign country would impose penalties for disclosing the information is not considered to be reasonable cause.

The recent experience of our tax litigation attorneys is that filing a Form 3520 late will result in an automatic assertion by the IRS of the penalty. However, a well-crafted reasonable cause statement (assuming that there are sufficient favorable facts) can result in the IRS relenting and reducing or eliminating the penalty. Many times, this will require a trip to trip to the IRS Independent Office of Appeals. Taxpayers, and their CPAs should be aware that the IRS’ first-time abatement (FTA) program is inapplicable to penalties for the late filing of Form 3520. Another possibility would be to use the IRS Streamlined Filing Procedure to limit the penalty to 5% of the gift. Unfortunately, the Streamlined Filing Procedure is only available if the taxpayer has unreported offshore income. The IRS also has a program known as the Delinquent International Information Return Submission Procedure. This may be the most useless procedure in the known universe. Under this procedure a reasonable cause statement must be submitted, and penalties will be assessed by the IRS unless it agrees that there is reasonable cause. Worse yet the IRS admits on its website that penalties may be assessed without any consideration by the IRS of the reasonable cause statement.

If you would like advice specific to your personal situation contact the tax attorneys at Brager Tax Law Group.