Foreign Gifts & Inheritances: The Hidden Trap of Form 3520
Inheriting a family property or receiving a large cash gift from your parents back home feels like a blessing—until you realize the IRS requires a detailed disclosure. For the 2025 tax year, the thresholds have been adjusted for inflation, and the filing rules are stricter than ever.
1. The Reporting Thresholds (2025 Tax Year)
You are not taxed on the gift, but you must file Form 3520 if you meet these triggers:
| Source of Gift | 2025 Threshold | Reporting Rule |
|---|---|---|
| Foreign Individual / Estate | $100,000 | Aggregate all gifts from the same person or related parties. |
| Foreign Corporation / Partnership | $20,116 | Aggregate all gifts from all foreign entities during the year. |
| Foreign Trust Distributions | $0 | Any distribution, regardless of amount, must be reported. |
2. Deadlines: A Tale of Two Dates
Unlike the FBAR, which has an automatic extension, Form 3520 deadlines depend heavily on your personal tax extension.
- March 16, 2026: Deadline for Form 3520-A (if you own a Foreign Trust).
- April 15, 2026: Standard deadline for Form 3520 (receipt of gifts).
- June 15, 2026: Automatic extension for expats living abroad.
- October 15, 2026: Final deadline if you filed an extension (Form 4868).
3. The “Good News” on Penalties (New for 2025)
In a major win for taxpayers, the IRS announced in late 2024 that it will no longer automatically impose penalties for late-filed Forms 3520 and 3520-A for gifts and bequests.
- The New Process: Before a penalty is assessed, the IRS will now review any Reasonable Cause Statement attached to the late form.
- The Old Risk: Previously, the IRS would automatically send a bill for 25% of the gift value, forcing taxpayers into a years-long appeals process.
KKCA Note: While automatic penalties have ended, the discretionary penalties remain massive—up to 25% of the total gift or 35% of a trust distribution.
4. Why “Aggregation” Matters
The IRS looks at “related parties.” If your father gives you $60,000 and your mother gives you $50,000 in 2025, you have exceeded the $100,000 threshold because they are related. You must file Form 3520 even though neither individual gift was over the limit.
5. Foreign Trusts: The Compliance Heavyweight
If your inheritance is coming through a Foreign Trust, you move from “informational reporting” into “high-complexity compliance.”
- Form 3520-A: This must be filed by the foreign trustee (or by you as a substitute) by March 16, 2026.
- Distributions: Even if you just use a house owned by a foreign trust, the IRS may treat the “fair market value of use” as a taxable distribution.
The KKCA Strategic Approach
We help our clients document the “Gift” nature of these transfers to ensure the IRS doesn’t recharacterize them as “unreported income.”
- Gift Deeds: Helping you secure the proper documentation from donors.
- Valuation: Assessing the USD value of foreign property bequests.
- Amnesty: Using the Streamlined Procedures to report years of missed gifts without the 25% penalty.
Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.
Disclaimer
This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.