Foreign gifts can trigger costly Form 3520 filing penalties

Foreign gifts and inheritances can feel straightforward; money or property arrives from a relative or other foreign person, and the recipient treats it as a gift. But U.S. information-reporting rules can make the transaction more complicated, especially when the transfer comes from a foreign trust, corporation, partnership, estate or covered expatriate. Because a true gift generally is not subject to income tax, it can seem like the simplest part of the return. It isn't. When a reporting rule applies, the IRS still expects to hear about it, and the form that reports it, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, carries some of the steepest penalties in the tax code, even when no income tax is due on the transfer.

The rules are precise; some thresholds are adjusted annually, and one wrong assumption can turn a routine gift into a five-figure penalty problem. Let's walk through what every tax professional needs to know.

What actually counts as a foreign gift?

A foreign gift is money or property a U.S. person receives from someone who isn't a U.S. person, treated by the recipient as a gift, bequest or inheritance. Qualified tuition and medical payments made directly on the recipient's behalf don't count. Neither do distributions from a foreign trust, but that exception comes with a catch worth remembering.

The distinction between a foreign gift and a foreign-trust distribution is important. If a foreign trust distributes cash or property, even if the recipient believes the transfer is a gift, the transaction generally belongs in Part III of Form 3520, not Part IV. The reporting obligation applies whether the distribution is taxable and whether the trust is treated as owned by another person under the grantor-trust rules. Getting this distinction wrong doesn't just mean the wrong box gets checked; it can mean the analysis was entirely wrong.

When does the filing requirement kick in?

The dollar thresholds depend on who's giving the gift:

• From a nonresident alien individual or foreign estate: Report if gifts from that donor, combined with related foreign persons, exceed $100,000 in the tax year. If the reporting threshold is met, each gift over $5,000 needs to be separately identified.
• From a foreign corporation or partnership: The bar is far lower, an inflation-adjusted $20,573 for 2026. Cross it, and the IRS may recharacterize the "gift" as taxable income.
• From a covered expatriate: A separate tax under §2801 may apply on top of the Form 3520 filing, with your client generally on the hook to pay it.

Code §6039F establishes the general statutory reporting framework for aggregate foreign gifts exceeding $10,000, subject to inflation adjustments and administrative rules distinguishing gifts from individuals and estates from purported gifts by corporations and partnerships.

The paper trail and penalties

Form 3520 is generally due on the 15th day of the fourth month after the end of the recipient's tax year, April 15 for calendar-year taxpayers. A qualifying U.S. citizen or resident living outside the United States and Puerto Rico, or serving abroad in the military, generally receives a two-month automatic extension. An income-tax extension generally extends Form 3520 only through the 15th day of the tenth month after year-end.

Before the return goes out the door, your client's file should include the donor's identity and status, the date and value of each transfer and whether any related parties were involved. If the money moved through a trust or entity, that needs to be documented too. Property gets valued as of the transfer date using standard gift-tax valuation rules. Failure to timely file, or filing incomplete or incorrect information, can allow the IRS to determine the tax consequences of the receipt. Section 6039F imposes a penalty equal to 5% of the foreign gift for each month the failure continues, capped at 25%. The penalty may be avoided if the taxpayer demonstrates reasonable cause and absence of willful neglect.

Get the full picture

Foreign gift and inheritance reporting rarely comes down to a single yes-or-no question. Donor status, entity type, related-party aggregation and filing deadlines all shape the answer, and getting any one of them wrong carries real consequences for your client.

Join Chad Silver, JD, on Oct. 16, 2026, for a practical webinar, Handling Foreign Gift and Inheritance Reporting; the webinar is also available on demand after the live event. Whether you handle these transfers regularly or want to be ready for the next one that lands on your desk, this session will sharpen your approach and help you protect your clients from costly missteps.