Foreign Gifts and Inheritances: U.S. Reporting Rules Under Form 3520

The common misconception: gifts are not always tax-free to recipients

Many U.S. taxpayers correctly understand that gifts are generally not includible in the recipient's U.S. gross income — the donor bears the gift tax obligation, not the recipient. What is far less well understood is that receiving large gifts or inheritances from foreign persons triggers a separate reporting obligation under Form 3520, regardless of whether any income tax is owed on the receipt. Failure to file Form 3520 when required can result in penalties that are staggering relative to the underlying tax cost — which is often zero.

Who must file Form 3520

A U.S. person must file Form 3520 — the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts — to report the receipt of gifts or bequests from foreign persons if any of the following thresholds are met in a calendar year:

•       Gifts from foreign individuals or foreign estates: aggregate amount received exceeds $100,000 during the tax year

•       Gifts from foreign corporations or foreign partnerships: aggregate amount received exceeds $19,570 in 2024 (this threshold is adjusted annually for inflation)

•       Distributions from foreign trusts: any amount received, regardless of dollar value — though the tax treatment and penalty structure differ from outright gifts

The $100,000 threshold for gifts from foreign individuals applies on an aggregate basis across all gifts received from related foreign persons during the year. A series of smaller gifts from the same foreign donor — or from related foreign donors acting in coordination — that collectively exceed the threshold triggers the reporting requirement.

What Form 3520 requires

Form 3520 requires the U.S. recipient to identify the foreign donor (name, address, and country), describe the nature of the gift or bequest, and report its dollar value. For gifts from foreign individuals, the recipient is not required to identify the donor's taxpayer identification number if they do not have it — but must provide as much identifying information as possible. The form is filed separately from the income tax return, due by the return's filing deadline including extensions.

It is important to note that the gift itself is not reported as income. Form 3520 is a pure information return. The IRS uses it to monitor potential unreported income (in case the "gift" is actually disguised compensation or a distribution from a foreign entity) and to track large cross-border wealth transfers. The absence of a tax liability does not make the filing optional.

Penalties for failure to file

The penalties for failing to file Form 3520 are severe and bear no relationship to any underlying tax liability. For failure to report a foreign gift, the penalty is 5% of the amount of the gift for each month the failure continues, up to a maximum of 25%. For failure to report a distribution from a foreign trust, the penalty is the greater of $10,000 or 35% of the gross reportable amount. These penalties can be abated for reasonable cause, but the burden is on the taxpayer to demonstrate that the failure was not due to willful neglect.

The gift vs. income question

The IRS may challenge whether a large transfer from a foreign person is truly a gift — particularly if it comes from a foreign employer, business partner, or entity in which the U.S. recipient has an interest. If the IRS recharacterizes a purported gift as compensation, a dividend, or a loan forgiveness, the income tax consequences can be substantial. Maintaining documentation of the donor's relationship to the recipient and the circumstances of the transfer is important both for substantiating the gift characterization and for demonstrating reasonable cause if the Form 3520 filing was inadvertently omitted.

If you have received or expect to receive a large gift or inheritance from a foreign family member or foreign entity, our cross-border tax attorneys can help you understand your reporting obligations and avoid the significant penalties for non-compliance. Contact us before the filing deadline.