How to Time a Foreign Person Foreign Gift for Form 3520 Filing

How to Time a Foreign Person Foreign Gift for Form 3520 Filing

Timing a Foreign Person Foreign Gift

Each year, international U.S. taxpayers may have various international information reporting forms that they are required to file to disclose their foreign accounts, assets, investments, and income. Some forms such as Form 5471 can be more complicated, whereas other forms such as the FBAR are less complicated. Likewise, some forms may be due in April while others are (generally) due in March. Also, some forms may go on automatic extension, while others may require the filing of Form 4868 or 7004. When it comes to the reporting of foreign gifts, Form 3520 is one of the types of international tax forms that the IRS likes to penalize taxpayers for when filing the form late. Thus, one important question with filing form 3520 and receiving a gift from a foreign person is when does a person receive a foreign gift?

Did You Receive or Have Control of the Gift?

In general, the concept of when a person receives a gift or other type of transfer involves a totality of the circumstance analysis to determine whether the person received the gift or asset and has a present ability to sell or otherwise transfer the asset.

Here are three different examples to consider when receiving a foreign gift:

Inheritance From a Foreign Person 

While for estate tax purposes, there are key distinctions between receiving an inheritance and receiving a gift — Form 3520 foreign gift purposes they are both essentially handled the same, and that they are both considered a reportable gift for Form 3520 reporting.

Let’s say that the decedent passes away on January 1, 2023. The U.S. person recipient will inherit $3,000,000 worth of assets. But, before the person inherits the assets a few creditors come out of the woodwork and dispute the estate amount claiming that the estate owes them $2,000,000. Even though the foreign person decedent passed away on January 1st with the intent of giving the gift/inheritance to the U.S. person beneficiary the U.S. person has not received the gift yet and does not have any control over the assets. In other words, the U.S. person cannot otherwise sell or transfer the assets because it is currently in dispute.

 Thus, in this scenario, the U.S. person beneficiary may want to take the position that they have not received the gift yet because technically they have not received the gift even though the foreign person has passed away and the intent is for the U.S. person to receive the gift. In other words, if the creditors were successful then the gift that the U.S. person receives would only be $1,000,000 million instead of $3,000,000 so prematurely reporting a Form 3520 gift of $3,000,000 would be inaccurate.

Gift (Present vs Future)

In this scenario, let’s assume that the foreign person has every intention of gifting an asset to the U.S. person beneficiary. In 2023, the foreign person decides that they want to gift their nephew in the United States $1 million. But, before the foreign person can give the gift, they pass away. The sister of the decedent decides that once the estate is administered she has every intent of giving the gift to the US person. In 2025, she gave the gift of $1,000,000 to the US person beneficiary.

In this scenario, while the foreign person decedent had every intention of giving the gift to the U.S. person, unfortunately, the gift was never transferred so the U.S. beneficiary could take the position that they did not receive the gift until 2025. While the decedent had every intention of giving the gift, in fact, that gift never transferred so the taxpayer did not receive a gift of more than $100,000 in 2023.

Control but Not Receipt

Here is one more example that is relatively common: A U.S. person received a gift from a foreign person in 2023. The foreign person had left the U.S. person about $1,000,000 in foreign assets and cash in a safety deposit box in a foreign country. The U.S. person has the right and the ability to control the gift and dispose of the assets if they want to, but they have not yet made the trek overseas as of the current time so they do not have the gift in hand.

In this type of situation, the IRS would probably take the position that since the U.S. person received the gift and has control over the gift — even though they have not technically taken possession of the gift — would be sufficient to have to report Form 3520 in the year they acquired the rights to the assets.

Evaluating Each Scenario Carefully

Due to the unfortunate fact that the IRS seems to enjoy issuing automatically assessed penalties to US taxpayers for failing to report foreign gifts or inheritances, it is important that taxpayers who may be considering filing late Form 3520 carefully and not realize the facts surrounding the noncompliance so that they can ensure that they meet the requirements of having to file the Form 3520 in the year they’re filing the form for.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.