Foreign trusts & gifts can require a special tax form

In some cases, those who conduct certain qualifying transactions using a foreign trust, those who own a foreign trust or those who receive a gift or bequest from a foreign person must file special tax documentation. It is important to make sure these dealings are in compliance with tax laws, or else harsh penalties can apply.

Examples of instances that would result in a need to file a tax document include:


  • Gifts. A U.S. person is required to file a form with the Internal Revenue Service (IRS) if he or she receives a gift from a nonresident alien or foreign estate that exceeds $100,000. If the gift was from a foreign corporation or partnership, the qualifying amount drops to gifts that exceed $15,671.
  • Trusts. The rules involving filing for owners of trusts are fairly broad. In many cases, the IRS requires filing even if there is not a transaction involving the trust during the tax year in question.

It is important to note that these are just a few examples that trigger the necessity of filing this special tax document, known as Form 3520.

How serious is it if this form is not filed with the IRS?

As noted above, penalties for a failure to comply with these requirements are harsh. Even a first offense can come with a $10,000 fine, 35 percent of the gross value of the property transferred to the foreign trust, 35 percent of the value of distributions received from a foreign trust or 5 percent of the gross value of the foreign trust, whichever is greater.

Those who are concerned that they may not be in compliance are wise to seek legal counsel. In some situations, defenses that result in a reduction of the penalties are available. Penalties generally do not result if, for example, failure to comply was not a case of willful neglect. It is wise to speak with an attorney to help determine the best course of action to come into compliance and reduce the risk of penalties.

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