Hidden Traps in International Gift Transfers: Don’t Let a Generous Gesture Trigger an IRS Headache
It might feel like a stroke of luck: a $100,000 bank transfer from your uncle overseas, delivered to you via your cousin in New York. You assume it's a generous gift, nothing more. But to the IRS, that transaction could raise red flags—especially when foreign funds, family ties, or trusts are involved. Maybe it was part of an inheritance from abroad, received during a time of grief when paperwork was the last thing on your mind. Or perhaps it came from a trust set up in another country that you didn’t even realize applied to you.
That’s where Form 3520 comes in.
This form is the IRS's way of tracking large foreign gifts and distributions from foreign trusts. It's not a tax form (no money is due), but it's an informational filing requirement, and failing to file can result in penalties of up to 25% of the gift's value. Even well-intentioned recipients can find themselves in hot water if the IRS views them as the true beneficiary of a foreign gift that passed through a U.S. intermediary.
What Is Form 3520, and When Do You Need to File It?
Form 3520, officially titled Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed by U.S. persons who, in a given tax year, receive:
Gifts or bequests of $100,000 or more from a foreign individual or estate
Distributions directly or indirectly from a foreign trust
The Trouble with "Indirect" Gifts
Not all foreign gifts are straightforward. If the money came to you directly from a foreign person and exceeds the $100,000 threshold, Form 3520 filing is usually required.
But what if the gift comes indirectly, through a U.S. person who received the money first? Whether or not you must file depends on whether that U.S. person acted independently or served as a conduit for the foreign gift. To make that determination, it's essential to understand a couple of key terms.
First, was the person an agent, nominee, or intermediary? This is a U.S. person who holds or transfers funds on behalf of a foreign person at their direction. If the U.S. person was merely the middleman, and you were the intended recipient, you are treated as having received the foreign gift directly and must file Form 3520.
Here's an example of the difference in whether you need to file Form 3520 or not:
No Form 3520 Needed: You receive $120,000 from your cousin, who received the money as a genuine, personal gift from your uncle overseas. She then decided, of her own accord, to gift it to you. She files Form 3520, and you don't need to.
Form 3520 Required: Your cousin receives $120,000 from your uncle abroad, who told her to pass the money along to you. She's acting as a nominee, and you are the intended beneficiary, so you must file Form 3520.
Intent is crucial when it comes to who files the form, and if you have questions, it's essential to work with an IRS tax lawyer to minimize your risk of fines and penalties. The Form 3520 instructions address how to complete it, but the language surrounding who must file and the information required can be confusing.
How to Know If You're on the Hook
Determining whether you or someone else needs to file Form 3520 comes down to one main question: Who was the money really meant for? When considering whether to file this form, ask yourself the following questions.
Did the money originate from a foreign person?
Was the transfer made through a U.S. person?
Was that U.S. person instructed to send it to you, or holding it on someone else's behalf?
Was there a documented intent from the foreign giver to benefit you, not the intermediary?
If the answers point to you being the true intended recipient, you likely need to file Form 3520.
Don't Guess, Because the Penalties Are Steep
Even though Form 3520 doesn't trigger tax, failing to file on time can bring significant penalties, including:
A $10,000 minimum fine
Up to 25% of the unreported gift amount
Loss of statute of limitations protection until the form is filed
Misunderstanding or ignoring these rules can turn a kind gesture into a costly experience, and dealing with IRS tax collection enforcement is an experience you want to avoid.
Still Not Sure? Take These Steps
If you've received funds with any foreign ties and are unclear about the filing requirement, here's what to do.
First, ask the right questions. That includes:
Who sent the funds?
Was there any instruction or documentation indicating that you were the intended recipient?
What was the U.S. intermediary's role?
Second, review communications and look for emails, letters, or other transaction records that clarify the original, foreign sender's intent. Third, consult with an IRS tax lawyer who understands the nuances of foreign gift reporting.
Lastly, don't delay. Form 3520 is due with your tax return, typically by April 15 (or October 15 if you've filed an extension).
Get Peace of Mind Before the IRS Comes Calling
Receiving money from a foreign relative can feel like a blessing, but it comes with reporting obligations if the IRS views you as the true recipient of a foreign gift routed through another U.S. person.
When in doubt, don't go it alone. If your situation involves foreign funds, family gifts, or unclear instructions, talk to an experienced IRS tax lawyer who can help you understand whether Form 3520 applies to you and keep you out of trouble.
Kundra & Associates is here to help you make sense of international tax rules, protect your finances, and file with confidence. Get in touch with us today, and let us handle your tax questions and concerns, so you can move past IRS worries and have peace of mind again.