What Form 3520 Is, and Why It Bites
Form 3520 is the IRS form that reports two things: a large gift or inheritance from a foreign person, and any dealings with a foreign trust. Its full name is the Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The important part for most families is what it is not. It is an information return, not a tax return, so filing it does not cost you any tax. A gift or inheritance from abroad is not income to you under US law.
So why does it hurt so many people? Because the penalty is tied to filing the form, not to owing money. You can owe zero tax, file the form a year late, and still face a penalty measured as a percentage of the gift itself. That is the trap. The money arrives clean, often by wire from a foreign bank, with nothing telling you a form is due, and the failure surfaces only later. Below, we walk through who has to file, what the penalty is, and the path that actually gets it removed.
When You Have to File: The $100,000 Threshold
You file Form 3520 for a foreign gift or inheritance when the total from one foreign source crosses a dollar line in a single calendar year. The lines are different depending on who the money came from:
- From a foreign individual or a foreign estate: more than $100,000 in the year. This covers the most common case, an inheritance or gift from a parent or relative who is not a US citizen or resident.
- From a foreign corporation or foreign partnership: a much lower threshold, around $20,573 for 2026, adjusted for inflation each year.
Two details catch people. First, you add up everything from one source across the whole year. Four wires of $30,000 from the same parent cross the $100,000 line together, even though no single transfer did. Second, gifts from people related to the giver can be counted together with theirs. If you have received money from family abroad and you are close to these numbers, it is worth a careful look before you assume you are clear. If you just received a foreign inheritance and want the calmer, step-by-step version, see reporting a foreign inheritance to the IRS.
Foreign Trusts and Form 3520-A
If your situation involves a foreign trust rather than a one-time gift, the reporting goes up a level. Setting up a foreign trust, putting assets into one, or receiving distributions from one all get reported on Form 3520. And if you are treated as the owner of the trust under US tax rules, the trust itself has to file a companion return, Form 3520-A.
Form 3520-A has its own trap: it is due March 15, a full month before your personal return, and it needs its own extension. People who extend their 1040 and assume everything moves with it miss it constantly. One useful exception is for certain Canadian retirement accounts, which are excused from this trust reporting by an IRS rule, though they still show up on other foreign-account forms. Foreign trusts get complicated fast, so the larger and ongoing ones are where we usually bring in co-counsel. For the full picture of how the US taxes a foreign trust, the grantor and non-grantor rules, and the throwback tax on distributions to US beneficiaries, see our guide to foreign trusts and US tax. If your foreign accounts are the bigger issue, see our FBAR and FATCA reporting overview.
The Penalties: Up to 25% of the Gift
Here is what is actually at stake when the form is late or missing:
- Foreign gift or inheritance (the gift portion): 5% of the gift for each month it is late, capped at 25% of the gift.
- Transfers to or distributions from a foreign trust (the trust portions): the greater of $10,000 or 35% of the amount involved.
- Form 3520-A not filed: the greater of $10,000 or 5% of the trust’s assets.
Put a number on it. On a $500,000 foreign inheritance reported late, the gift penalty can reach $125,000, for a form that owed no tax at all. These notices, often a CP15, are generated automatically and can land in the six figures. They look terrifying. The next two sections are the reason they are far more survivable than that first letter suggests, and if one is already in your mailbox, our CP15 penalty notice guide covers the response deadline and the fight itself.
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Book your free consultThe Open-Year Trap That Never Expires
There is a quieter danger than the penalty, and it is the reason "I will just wait it out" does not work. Normally the IRS has a limited window to look back at a tax year, and after it closes you are safe. But when a required Form 3520 (or several other foreign-information forms) is not filed, that window for the entire tax year never even starts. It stays open until you finally file the form, plus three years after that.
In plain terms: a foreign gift you received and never reported eight years ago can still be examined today, along with everything else on that year’s return. Time does not heal this; only filing does. That is why the answer to an old, unreported gift is almost always to come forward and file correctly now, which both addresses the penalty and starts closing the year. It is also why a "quiet" fix, just mailing in old forms with no explanation, is the wrong move. The IRS treats that as a red flag, and it forfeits the protection that a proper reasonable-cause filing gives you.
Reasonable Cause: How Penalties Get Erased
Most people who missed Form 3520 did so for an understandable reason: no one ever told them a tax-free inheritance had to be reported, the foreign lawyer settling the estate said nothing about US forms, the money simply arrived. That is the heart of a reasonable-cause defense. Reasonable cause means you used ordinary business care and prudence and still missed the deadline. It is not a guarantee, and ignorance alone is not always enough, but a well-documented story of an honest, careful taxpayer is exactly what this relief is built for.
The timing of how the IRS handles this changed in your favor. The change followed years in which the IRS charged these penalties automatically and then abated, by the National Taxpayer Advocate's count, more than $179 million of them a year from 2018 to 2021, a record that spoke for itself. As of late 2024, the IRS reviews reasonable cause before it charges a Form 3520 penalty, both for the foreign-gift portion and for the foreign-trust portions, rather than charging first and making you fight to undo it. A 2025 update pushed even more of these to a no-action close at the campus level when the submission is well documented. CP15 penalty notices for Form 3520 have been reduced to zero, at the IRS appeals level and through stand-alone reasonable-cause letters, where the documentation is strong. The lesson is consistent: the reasonable-cause statement you submit with the late form is the single thing that decides the outcome, so it is worth building carefully.
Why These Penalties Are Being Fought in Court
You may have read that these foreign-information penalties are being challenged, and that some taxpayers won. That is true, and it is also more tangled than the headlines suggest. The fight is over whether the IRS can charge certain related penalties automatically, or whether it has to go to court to collect them. Two federal appeals courts have now sided with the IRS on a neighboring penalty, while the US Tax Court has held the opposite on others, and the question is still working its way up. For the foreign-trust portions of Form 3520, courts have generally treated the penalties as something the IRS can assess directly.
Here is our honest take. We do not build your plan on an unsettled court fight that could swing either way next year. The reliable lever, the one that works under the IRS’s own current procedure, is reasonable cause. We lead with that, and we keep the assessability and constitutional arguments in reserve for the matters where they fit. If your case ends up in a genuine dispute, that is litigation, and it is the kind of courtroom work this firm does rather than hands off.
How We Work, and When We Co-Counsel
Cross-border reporting covers a wide range, so we are honest about where our role sits. A straightforward foreign gift or inheritance, the screening, the reasonable-cause package, and the late Form 3520 filing, is handled here, on a fee quoted up front once we see the facts. For ongoing foreign trusts, layered offshore structures, and large multi-year cleanups that also involve unreported foreign income, we co-counsel with an international tax advisor so you get the right depth without paying for the wrong tool.
Almost all of this is done remotely, by phone and video, which fits clients who are out of state or out of the country. If a foreign inheritance is also bringing foreign accounts into your life for the first time, the reporting tends to come in layers, and our international and cross-border hub maps how the FBAR, FATCA, and trust forms fit together.
Frequently Asked Questions
Do I Owe Tax on a Foreign Gift or Inheritance?
Usually no. A gift or inheritance you receive from a non-resident foreign person is not income to you, so it is not taxed on your Form 1040. The catch is the reporting: if the total from one foreign person crosses $100,000 in a calendar year, you must report it on Form 3520. The penalty is for not reporting, not for owing tax, which is why so many people get caught off guard.
What Is the Penalty for Filing Form 3520 Late?
It depends on what you missed. For an unreported foreign gift or bequest, the penalty is 5% of the gift per month it is late, up to 25% of the gift. For transfers to or distributions from a foreign trust, the penalty is the greater of $10,000 or 35% of the amount involved. On a $500,000 inheritance, that is up to $125,000. The good news: these penalties are often removed for reasonable cause.
How Big Does a Foreign Gift Have to Be Before I Report It?
For gifts or inheritances from a foreign individual or a foreign estate, the trigger is more than $100,000 from that person (and people related to them) in one calendar year. For gifts from a foreign corporation or foreign partnership, the threshold is much lower, around $20,573 for 2026, and adjusts for inflation each year. You add up everything from one source across the whole year, not gift by gift.
I Already Got the Money Years Ago and Never Filed. Am I in Trouble?
You have a real problem, but a fixable one. Because the form was never filed, the IRS clock that normally closes old years stays open, so the exposure does not just disappear with time. The standard fix is to file the late Form 3520 now with a strong reasonable-cause statement explaining why it was missed. Do not quietly file and hope. We screen the facts first and build the reasonable-cause package around them.
What Is Reasonable Cause, and Does It Actually Work?
Reasonable cause means you acted with ordinary care and prudence but still missed the filing, for example because no one ever told you a tax-free inheritance had to be reported. As of late 2024, the IRS reviews reasonable cause before it assesses a Form 3520 penalty, both for foreign gifts and for the foreign-trust portions, instead of charging first and asking later. CP15 penalty notices for Form 3520 have been reduced to zero with strong documentation. Results depend on your facts.
What Is Form 3520-A and Who Files It?
Form 3520 is your return; Form 3520-A is the foreign trust’s return, filed when a US person is treated as the owner of a foreign trust. It is due March 15, a month earlier than your 1040, and it needs its own extension. Missing it is common because the date sneaks up. The penalty is the greater of $10,000 or 5% of the trust’s assets. If you own or fund a foreign trust, both forms usually come as a pair.
Does an Inheritance From My Parents in Israel Count?
Yes, if it crosses the threshold. A bequest from a parent who was not a US citizen or resident is a foreign gift for this rule. Money wired from an Israeli estate or a foreign bank often arrives with no tax form attached, and the foreign lawyer settling the estate rarely warns the US heir. That is exactly the situation Form 3520 is built for, and one of the most common we see with Americans who have family abroad.
Why Are These Penalties Being Challenged in Court?
Courts have been split on whether the IRS can charge some of these foreign-information penalties automatically or must go to court to collect them. Two federal appeals courts now say the IRS can assess certain related penalties directly, while the Tax Court has pushed back on others, and the issue is still moving. We do not build a plan on an unsettled court fight. We lead with reasonable cause, which works under current IRS procedure, and keep the other arguments in reserve.
Do You Handle This In-House or Refer It Out?
Both, depending on complexity. The screening, the reasonable-cause package, and the late Form 3520 filing for a straightforward foreign gift or inheritance are handled here. For ongoing foreign trusts, layered offshore structures, and large multi-year cleanups that also involve unreported income, we co-counsel with an international tax advisor so you get the right depth. We tell you up front which your matter needs.
Common Situations
The inheritance from abroad. A US citizen in Florida inherits about $400,000 from a parent in Israel. The money wires in over several months, no tax form attached, and three years pass before an accountant asks the right question. Because the gift was over $100,000, Form 3520 was due. The failure was innocent, so a late filing with a reasonable-cause statement is the path, and the open-year clock starts closing once it is filed.
The CP15 in the mailbox. A client opens an automated IRS notice charging a six-figure penalty for a Form 3520 filed late. It reads like a final bill. It is not. Under current IRS procedure, reasonable cause is reviewed before these stick, and well-documented notices like this have been reduced to zero. The work is in the documentation, not in panic.
The foreign trust nobody flagged. A family funded a trust overseas years ago and has been taking distributions, never filing Form 3520 or the March 15 companion return. This is the layered case where we screen the facts, then co-counsel an international tax advisor on the trust mechanics while handling the Florida and filing side here.
Sources of Law
- Foreign gifts and bequests: IRC §6039F (Form 3520 Part IV); reporting threshold of more than $100,000 from a foreign individual or estate; lower inflation-adjusted threshold (about $20,573 for 2026; verify at irs.gov yearly) for gifts from foreign corporations or partnerships; gift penalty 5% per month up to 25%. irs.gov
- Foreign trusts: IRC §§6048, 6677 (Forms 3520 and 3520-A); trust-portion penalty the greater of $10,000 or 35% of the amount; Form 3520-A penalty the greater of $10,000 or 5% of trust assets; Form 3520-A due March 15.
- Open statute of limitations: IRC §6501(c)(8) (income-tax year stays open until the information return is filed, plus three years).
- Reasonable cause reviewed before assessment: IRM 20.1.9.13.3 (gift/bequest, §6039F) and IRM 20.1.9.14.3 (trust portions, §6677) (October 2024); IRM 21.8.2.19.2 (October 2025, campus-level gating). irs.gov IRM 20.1.9
- Assessability litigation context: Farhy v. Commissioner (D.C. Cir. 2024) and Safdieh v. Commissioner (2d Cir. 2026) (related §6038(b) penalties assessable); Mukhi v. Commissioner, 163 T.C. No. 8 (2024) (Tax Court contrary); Wilson v. United States, 6 F.4th 432 (2d Cir. 2021) (35% foreign-trust penalty). Canadian retirement-account exception: Rev. Proc. 2014-55. (retrieved 2026-07-11)
Updated on July 24, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate planning and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This article is general information about US tax and Florida law, not legal or tax advice, and does not create an attorney-client relationship. Foreign-information penalties and reasonable-cause relief turn on your specific facts and on IRS procedures that change; for foreign trusts and large multi-year cleanups we co-counsel an international tax advisor. Past results do not guarantee a similar outcome.