Do I have to report a gift or inheritance from outside the United States?
A gift or bequest received from a foreign person can require an information return. US persons file Form 3520 to report the receipt of certain large gifts or bequests from certain foreign persons, along with certain transactions with foreign trusts and ownership of them. Reporting the receipt is a separate question from whether any US tax arises.
Key points
- US persons and executors of estates of US decedents file Form 3520 to report the receipt of certain large gifts or bequests from certain foreign persons.
- Form 3520 also reports certain transactions with foreign trusts and ownership of foreign trusts under sections 671 through 679.
- The reporting thresholds and definitions for foreign gifts are set out in the Form 3520 instructions, so the instructions for the relevant year should be checked rather than a remembered figure.
- Form 3520 is an information return, so filing it reports the receipt and is separate from the question of whether any US tax arises on what was received.
- A US owner of a foreign trust brings Form 3520-A, the annual information return of a foreign trust with a US owner, into the picture alongside Form 3520.
What does Form 3520 report?
Form 3520 is filed by US persons, and by executors of estates of US decedents, to report three separate things: certain transactions with foreign trusts, ownership of foreign trusts under the rules of sections 671 through 679, and the receipt of certain large gifts or bequests from certain foreign persons. The third is the one that reaches an ordinary family transfer, and section 6039F is the provision requiring notice of large gifts received from foreign persons.
The qualifier "certain" is load-bearing. The requirement applies above a reporting threshold, and the thresholds and definitions live in the Form 3520 instructions, with amounts that change over time. Note also where the form goes: Form 3520 is filed separately from the income tax return, mailed to the IRS service center in Ogden, Utah, rather than attached to the Form 1040. It is generally due on the income tax return's due date, and an extension of the income tax return extends it, but never beyond the 15th day of the tenth month after the end of the tax year. Related transfers can be aggregated, so a series of payments from one family can be reportable where a single payment would not be. Checking the instructions for the year in question is the reliable step.
Does receiving a foreign gift mean you owe US tax?
Form 3520 is an information return. Filing it is how the receipt gets reported; whether the money carries a US tax consequence is a separate question that turns on what was actually received, from whom, and in what capacity.
That distinction matters because labels travel badly across borders. A transfer described as a gift may in substance be payment for services, a repayment of a loan, a distribution from a foreign company, or income of the recipient — and it is taxed according to what it is, not what the wire memo says. Where the character of a transfer is not obvious, working it out before the return is filed is considerably easier than explaining it afterwards.
What about money that comes through a foreign trust?
Foreign trusts are a second layer. A distribution from a foreign trust to a US person is reported on Form 3520, and a US owner of a foreign trust also brings Form 3520-A, the annual information return of a foreign trust with a US owner, into the picture. Family arrangements created under another country's law are sometimes treated as trusts for US tax purposes even when nobody involved used that word.
There is a professional boundary here. Creating, amending, or interpreting a trust instrument is legal work that an attorney does. The reporting that follows — which forms are due, by whom, and for which year — is the accountant's side. Those two pieces need to be coordinated, because a structure settled abroad without US tax input can be expensive to report and difficult to unwind.
What else can the money trigger once it arrives?
The part most often missed comes after the transfer. If the funds sit in an account outside the United States, that account can create an annual FBAR obligation on FinCEN Form 114, filed with the Financial Crimes Enforcement Network rather than with the IRS, once foreign accounts pass the aggregate threshold at any time in the calendar year. The same holdings can also count toward Form 8938, the statement of specified foreign financial assets, which is attached to the income tax return and has its own thresholds that vary by filing status and by whether the filer lives abroad.
The asset type changes the answer. Inherited foreign real estate held directly is outside both reports. An inherited foreign bank account, foreign securities held outside an account, or an interest in a foreign partnership may not be. Keep documentation of what arrived, from whom, and when, and raise it with your preparer for the year of receipt rather than the year someone notices.
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