If you live in the United States, you may receive financial support from your family in Japan or inherit assets from them. In such cases, one important requirement to be aware of is the obligation to file Form 3520.
You might wonder, “Isn’t a gift tax-free?” While gifts and inheritances themselves are generally not taxed in the U.S., the IRS requires you to report them if they exceed a certain threshold.
Failing to file Form 3520 can result in penalties of up to 25% of the amount received, making it essential to understand the requirements in advance.
However, if you can demonstrate a Reasonable Cause and show that you acted in good faith, penalties may be waived.
Let’s take a closer look at who needs to file Form 3520 and the potential risks of not filing it.
What is Form 3520?
Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) is a tax form required in the following cases:
- Receiving gifts or inheritance exceeding $100,000 per year from a foreign source (typically from family members or relatives).
- Receiving gifts exceeding $19,570 (as of 2024) per year from a foreign corporation or foreign partnership.
- Being a beneficiary of a foreign trust or making contributions to a foreign trust.
For example, if you receive remittances or inherited assets from your family in Japan exceeding $100,000 in a year, you are required to report it to the IRS, even if no U.S. gift or inheritance tax applies.
Failure to comply with this filing requirement may result in significant penalties, so it is crucial to be aware of these obligations.
Who Needs to File Form 3520?
The obligation to file Form 3520 applies to individuals who are considered U.S. residents for tax purposes under U.S. tax law.
Who Qualifies as a U.S. Resident for Tax Purposes?
- U.S. Citizens → Always considered U.S. tax residents.
- U.S. Permanent Residents (Green Card Holders) → Always considered U.S. tax residents.
- Individuals who meet the Substantial Presence Test → Depending on their visa type and the number of days spent in the U.S., they may be classified as U.S. tax residents.
Determining whether you qualify as a U.S. resident for tax purposes depends on individual circumstances. If you are unsure whether you are required to file Form 3520, it is recommended to consult a tax professional.
What Happens If You Don’t File Form 3520?
If you fail to file Form 3520 or report incorrect information, the IRS may impose severe penalties.
Penalties for Failing to Report Gifts or Inheritance
If you receive $100,000 or more from a foreign individual (such as a parent or relative in Japan) and do not file Form 3520, you could face a penalty of up to 25% of the received amount.
For example, if you receive $150,000 from your parent in Japan but fail to report it, you may be subject to a penalty of up to $37,500.
Penalties for Failing to Report Gifts from Foreign Corporations or Partnerships
If you receive gifts exceeding $19,570 (as of 2024) from a foreign corporation or partnership and fail to file Form 3520, the penalties may include:
- An initial 5% penalty of the received amount.
- An additional 5% penalty per month, up to a maximum of 25%.
Penalties Related to Foreign Trusts
Penalties Related to Foreign Trusts
- If a foreign trust owner fails to file Form 3520, they may face a 35% penalty on contributions made to the trust.
- If a beneficiary fails to file Form 3520, they may be penalized 35% of the distributed amount received from the trust.
The IRS has increased its monitoring of foreign assets, cross-referencing banking transactions and FBAR (Foreign Bank Account Report) filings.
Claiming “I didn’t know” may not be accepted as an excuse, so it is crucial to take action and comply with the requirements as early as possible.
Conclusion: Don’t Forget to File Form 3520!
It’s common to assume that gifts or inheritances from family in Japan are tax-free, but IRS reporting requirements are a separate issue. Make sure to pay attention to the following key points:
- Foreign gifts or inheritance exceeding $100,000 per year must be reported on Form 3520.
- Failure to report may result in penalties of up to 25% of the received amount.
- Be cautious when dealing with foreign corporations or foreign trusts.
- The filing deadline is April 15 (with an extension available until October 15).
If you forget to file Form 3520, you may be able to reduce penalties by promptly submitting it to the IRS with a “Reasonable Cause” explanation.
If you’re unsure whether you need to file Form 3520, have missed the deadline, or want to avoid penalties, consulting a tax professional is highly recommended. Ensure proper reporting and protect yourself from unnecessary risks!
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