Of all the international forms I handle, Form 3520 produces the most surprised phone calls. Someone inherits money from a parent abroad, wires it into a U.S. account, and assumes the matter is closed because an inheritance is not taxed. Two years later a penalty notice arrives for tens of thousands of dollars. The tax was never the problem. The reporting was.
Form 3520 is an information return, not a tax return. It does not calculate tax on a foreign gift or inheritance. It simply tells the IRS the money exists. But the penalty for not filing it is steep, it is assessed per year, and for most of the last decade it was applied automatically before anyone read your explanation. If you have received a large gift or inheritance from outside the United States, or you have any connection to a foreign trust, this is a form you cannot ignore.
This post covers what Form 3520 reports, the four situations that trigger it, the dollar thresholds that catch people off guard, how it differs from Form 3520-A, the penalties, a recent and favorable shift in IRS enforcement, and what to do if you have already missed a filing.
What is Form 3520?
Form 3520 is titled "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts." Despite the word "trusts" in the title, most individuals encounter it for a much simpler reason: they received a large gift or inheritance from a person or estate outside the United States.
The form is filed separately from your Form 1040. You do not attach it to your income tax return. It goes to a separate IRS processing center in Ogden, Utah, and it is due on the same date as your income tax return, including extensions. That separation trips people up. You can file a perfect 1040, pay every dollar of tax you owe, and still be out of compliance because the Form 3520 was never mailed.
It is a disclosure form, and the IRS treats it accordingly. The penalty has nothing to do with whether you owe tax. You can owe zero dollars and still face a substantial penalty purely for failing to report. This is the same logic that governs other international disclosures like the FBAR and foreign account reporting: the government wants visibility into cross-border money movement, and it enforces that visibility with penalties rather than tax.
The four situations that trigger a Form 3520 filing
A U.S. person (citizen, green card holder, or resident for tax purposes) must file Form 3520 in any of the following four situations. Most people only ever encounter the first one, but all four carry exposure.
1. You received a large gift or inheritance from a foreign person
This is the most common trigger and the one that catches ordinary families. If you receive gifts or bequests from a nonresident foreign individual or a foreign estate, and the total for the year exceeds $100,000, you must report it in Part IV of Form 3520. An inheritance counts as a bequest. So does a gift of cash, property, or a transfer into your name. The $100,000 figure is an aggregate, not a per-gift number, and it includes amounts from people you know or have reason to know are related to the giver.
2. You transferred money or property to a foreign trust
If you create a foreign trust, or transfer assets to one, you report that transfer on Form 3520. This includes funding a trust set up under the laws of another country, and it can sweep in arrangements that do not look like trusts to an American eye, such as certain foreign retirement, pension, and savings vehicles that the IRS classifies as trusts.
3. You are treated as the owner of a foreign trust
Under the grantor trust rules in sections 671 through 679 of the tax code, a U.S. person who funds or controls a foreign trust is often treated as owning it for tax purposes. If that is you, you have an annual Form 3520 obligation, and the trust itself has a companion obligation on Form 3520-A, which I cover below.
4. You received a distribution from a foreign trust
If you receive a distribution from a foreign trust, whether in cash or property, directly or indirectly, you report it on Form 3520. Distributions from foreign trusts carry their own complicated tax math, including the "throwback" rules that can apply punitive interest charges to accumulated income. This is one of the areas where a do-it-yourself approach goes wrong most often.
Foreign inheritances are reportable, not taxable
This is the single biggest misconception I correct, so it deserves its own section. When a U.S. person inherits money or property from someone abroad, the inheritance itself is generally not subject to U.S. income tax. The United States taxes the estates of its own citizens and residents, but it does not impose income tax on the recipient of a foreign inheritance simply for receiving it.
So people reasonably conclude there is nothing to do. The money is not taxed, so why would the IRS care? The answer is that the reporting requirement is independent of the tax requirement. The IRS wants to know about the inflow regardless of taxability, and Form 3520 is how it finds out. Skipping the form because "it is not taxable" is exactly the reasoning that leads to a penalty notice. The inheritance stays tax free. The failure to report it does not.
The reporting thresholds that catch people
The thresholds depend on who the gift or inheritance came from. These are the numbers that determine whether you have a filing obligation at all:
- From a foreign individual or a foreign estate: you must file if the total received during the year exceeds $100,000. This figure is set by statute and does not change with inflation.
- From a foreign corporation or foreign partnership: the threshold is far lower and adjusts every year for inflation. For 2026 it is $20,573 (it was $20,116 for 2025). Gifts from entities are also subject to extra scrutiny, because the IRS can recharacterize a purported "gift" from a foreign company as taxable income.
- Aggregation applies: you cannot evaluate each gift in isolation. You combine amounts received from related foreign persons, and for entities you combine across all foreign corporations and partnerships, to test whether you have crossed the line.
Two practical traps follow from these rules. First, families often spread a transfer across several relatives abroad, each sending a portion. Because related-party amounts aggregate, the combined total can blow past $100,000 even when no single transfer does. Second, a gift routed through a family business overseas is treated as coming from a corporation, which drops you into the much lower entity threshold and invites questions about whether it was really a gift at all.
Form 3520 versus Form 3520-A
These two forms are constantly confused, so here is the distinction in plain terms. Form 3520 is filed by the U.S. person: the recipient of a gift, the transferor to a trust, the owner of a trust, or the beneficiary of a distribution. Form 3520-A, titled "Annual Information Return of Foreign Trust With a U.S. Owner," is filed by the foreign trust itself, and it reports the trust's income, balance sheet, and distributions.
The catch is the deadline and the responsibility. Form 3520-A is due on the fifteenth day of the third month after the end of the trust's tax year, which is March 15 for a calendar-year trust, earlier than your personal return. And here is the part that surprises U.S. owners: if the foreign trustee does not file Form 3520-A (and foreign trustees frequently will not, because they have no reason to deal with the IRS), the U.S. owner must file a substitute Form 3520-A to avoid the penalty. The obligation does not disappear just because the trustee is uncooperative. It lands on you.
The penalties
This is why Form 3520 matters so much. The penalties are among the harshest in the international reporting system, and they are tied to the size of the asset rather than to any tax owed:
- Failure to report a foreign gift or inheritance (Part IV): 5% of the unreported amount for each month the failure continues, capped at 25%. On a $400,000 inheritance, that is a potential $100,000 penalty for a missing form, with no tax due on the underlying inheritance.
- Failure to report a transfer to or distribution from a foreign trust: the greater of $10,000 or 35% of the gross value of the property transferred or the distribution received.
- Failure to file Form 3520-A (trust ownership): the greater of $10,000 or 5% of the gross value of the trust assets treated as owned by the U.S. person.
Continued failure after the IRS issues a notice can add further penalties. And because these are information-return penalties, the usual defense is not "I did not owe tax." It is reasonable cause: a credible, well-documented explanation of why the form was late or missed, free of willful neglect.
A recent and favorable shift in IRS enforcement
For years the most painful feature of Form 3520 was automatic assessment. The IRS would assess the penalty the moment a late form was processed, often before anyone looked at the taxpayer's reasonable cause statement, and then push the case into collections. Taxpayers were left fighting to abate a penalty that should never have been assessed in the first place. The Taxpayer Advocate reported that the IRS later abated a large majority of these penalties on appeal, which tells you how many were wrong from the start.
On October 24, 2024, the IRS announced a meaningful change. It stopped automatically assessing penalties on late-filed Forms 3520 that report foreign gifts and bequests (Part IV). Going forward, the IRS reviews any reasonable cause statement attached to the late filing before deciding whether to assess a penalty. That is a significant improvement for the family that inherited money abroad, filed late once they learned of the requirement, and attached a good explanation.
Two cautions, though. The relief is focused on the foreign gift and bequest side of the form. The IRS has been slower to extend the same pre-assessment review to the foreign trust penalties, which can still be assessed aggressively. And "we will read your statement first" is only an advantage if the statement is actually persuasive. A late filing with a thin or boilerplate reasonable cause explanation still invites a penalty. The change rewards careful filing; it does not excuse a missing form.
How Form 3520 fits with your other international filings
Form 3520 rarely travels alone. The same event that triggers it often triggers other obligations, and missing the connected forms is how a single oversight becomes several penalties:
- An inheritance wired into a foreign account you control can trigger FBAR and Form 8938 reporting on that account. The international reporting rules stack on top of each other.
- If the inheritance includes shares in a family business overseas, you may also have a Form 5471 obligation as a U.S. owner of a foreign corporation, which carries its own $10,000 starting penalty.
- If you are a U.S. citizen living abroad, foreign gifts and inheritances are a routine part of life, and they interact with your expat tax filings in ways that need to be coordinated rather than handled form by form.
This is why I treat Form 3520 as one piece of a complete picture rather than a standalone task. When a new client comes to me with a foreign inheritance, the first job is to map every reporting obligation the event created, then file them together and consistently. You can see how that fits into the broader international tax services I provide.
What to do if you have already missed a Form 3520
If you are reading this because you received a foreign gift or inheritance in a prior year and never filed, the most important thing is not to panic and not to wait. The exposure grows the longer it sits, and a voluntary, well-prepared late filing is in a far stronger position than one the IRS discovers on its own.
The path forward usually involves filing the delinquent Form 3520 with a thorough reasonable cause statement that documents why the form was missed and demonstrates the absence of willful neglect. Facts matter here: when you learned of the requirement, why you did not know earlier, what you did once you found out, and your overall history of compliance. Given the October 2024 change in how the IRS handles late gift filings, a strong reasonable cause statement now has a real chance of being reviewed before any penalty is assessed, which is exactly the moment where good preparation pays off.
Every situation is different, and the right approach depends on the dollar amounts, the number of years involved, and whether trusts or foreign accounts are also in the picture. This is not a place for guesswork. It is a place to work with someone who files these forms regularly and knows how the IRS evaluates them.
Get help from a Form 3520 specialist
If you have received a large gift or inheritance from abroad, or you have any connection to a foreign trust, book a free consultation. I will tell you exactly where you stand: whether a Form 3520 is required, what the threshold and timing look like for your situation, and whether any prior years need to be corrected.
If you have already missed a filing, we will build a plan before the exposure grows further. The consultation is free, and in most cases the picture becomes clear within thirty minutes. With this form, acting early is always cheaper than waiting for a notice.