Many taxpayers are shocked to learn that even though gifts are generally not taxable to the recipient, certain foreign gifts must still be reported to the IRS. Failure to do so can result in substantial penalties, even when no tax is owed.
If you received money or property from a foreign person, foreign corporation, or foreign partnership, the IRS may require you to file Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
When Form 3520 is required
You must report foreign gifts if, during the year, you received:
• More than $100,000 in total from nonresident alien individuals or foreign estates that you treated as gifts or bequests; or
• More than the annual threshold from foreign corporations or foreign partnerships that you treated as gifts (this amount is indexed for inflation and is approximately $19,000 for recent tax years).
These thresholds apply to the aggregate amount received during the year, not per transfer.
Due date for reporting
Form 3520 is an information return, not a tax return. It is due on the same date as your individual income tax return, including extensions. If you extend your Form 1040, the extension also applies to Form 3520.
Penalties for failure to file
The penalties for failing to report foreign gifts are severe:
• 5% of the gift value per month,
• Up to a maximum of 25% of the total gift,
• Plus interest.
These penalties apply even though the gift itself is not taxable.
Example
Assume you received $120,000 from your parents in India as a gift. If you failed to file Form 3520 by the due date and did not request an extension, the IRS could assess penalties of up to $30,000, plus interest — even though no income tax was due on the gift itself.
A common and costly misunderstanding
Many taxpayers rely on professional advice and are told that “gifts are non-taxable, so there is nothing to report.” While it is true that gifts are generally not subject to income tax, that advice is only partially correct when the gift comes from a foreign source.
The IRS treats foreign gifts as a compliance issue, not an income issue, and aggressively enforces reporting under Form 3520.
Bottom line
If you received money or property from family, friends, or entities outside the United States, do not assume there are no IRS filing requirements. Proper reporting can prevent penalties that often far exceed the amount of tax that would ever be owed.
