Foreign Gifts and Inheritances: Form 3520 Traps

Here is the good news first: if your parents overseas send you money, or a relative abroad leaves you an inheritance, you generally do not owe U.S. income tax on it. A gift is a gift.

Here is the part that catches people: you may still have to report it to the IRS on Form 3520. And the penalty for not reporting can reach 25% of the gift — on money that was never taxable in the first place.

Who Has to File Form 3520 for a Foreign Gift?

You must file if you are a U.S. person (citizen, green card holder, or U.S. tax resident) and during the year you received:

Gift came from	Report when total for the year is more than
A foreign individual or foreign estate (including inheritances)	$100,000
A foreign corporation or foreign partnership	$20,573 (2026; adjusted for inflation each year)

Form 3520 is due on the same date as your income tax return, including extensions — so if you extend your Form 1040 to October 15, Form 3520 is extended too. It is mailed separately to the IRS in Ogden, Utah; it is not attached to your 1040.

Trap #1: "Each Gift Was Under $100,000"

The $100,000 test is based on the total you received during the year, and gifts from related people are added together.

Example: Your mother in Korea wires you $60,000 in March to help with a down payment. Your father sends $55,000 in September. Neither gift alone is over $100,000 — but together they total $115,000, so you must file Form 3520.

If you miss it, the penalty can be 5% of the gifts for each month late, up to 25%. On $115,000, that is as much as $28,750.

Trap #2: Forgetting That Inheritances Count

An inheritance from a foreign relative is reported the same way as a gift. If your aunt in Hong Kong leaves you $300,000, you report it on Form 3520 for the year you actually receive it — not the year she passed away.

Two more things to know about inherited money:

•       The inheritance itself isn't taxable, but interest, dividends, or rent it earns afterward are — and must be reported on your 1040.

•       If the money stays in a foreign bank account, you may now need to file an FBAR and possibly Form 8938 every year going forward.

Trap #3: The Money Came From a Company or a Trust

If the "gift" was paid by a family business overseas, the reporting threshold drops to about $20,000 — and the IRS can treat the payment as taxable income instead of a gift, depending on the facts. The simplest fix is to have the money come from the individual, not their company.

Money received from a foreign trust is a different situation altogether. Trust distributions are reported on a different part of Form 3520, have their own rules, and can be taxable. Don't assume a trust distribution is a "gift."

Trap #4: Mixing Up Who Files What

•       Gift from a foreign person to you: you (the U.S. recipient) may need to file Form 3520. The foreign giver generally owes no U.S. gift tax on cash.

•       Gift from a U.S. citizen relative living abroad: this is not a foreign gift. Nothing goes on Form 3520 — instead, the giver may need to file Form 709 if the gift is over the annual exclusion.

•       Married couples who file a joint income tax return can file one joint Form 3520.

Trap #5: Not Keeping the Paper Trail

Large wire transfers from overseas get noticed by banks — and sometimes by the IRS. Keep a short gift letter from the giver, the wire confirmations, and, for inheritances, a copy of the will or estate documents. This documentation proves the money was a gift and not income, and it helps establish your cost basis if you inherited property or investments that you later sell.

What If You Already Missed It?

You're not alone — this is one of the most commonly missed IRS forms. The usual path is to file the late Form 3520 with a reasonable cause statement explaining why it was late. Be aware that the IRS often assesses the penalty automatically when a late form is processed, so the statement needs to be clear and well-supported. Penalties can be challenged but getting the facts and timing right matters.

Gifts and inheritances from abroad are usually tax-free, but they are not paperwork-free. The penalty is based on the size of the gift, not on any tax owed, which is why a missed Form 3520 can be so expensive.

1.      Add up everything you received from abroad this year, including money from both parents and other relatives.

2.      Check who actually sent the money — an individual, a company, or a trust — before deciding how to report it.

3.      Get a simple gift letter and keep wire records in your tax files.

4.      Extend your 1040 if needed — Form 3520 gets the same extension.

5.      If you missed a prior year, act before the IRS contacts you. A well-prepared reasonable cause statement has a better chance before a penalty notice arrives.

Received money or an inheritance from family overseas? MKHS Tax Group helps clients file Form 3520, catch up on missed years, and respond to penalty notices. Email us at info@mkhstaxgroup.com to schedule a consultation.