IRS Notice 97-34 is the guidance that put teeth on the foreign trust and foreign gift reporting rules Congress added in the Small Business Job Protection Act of 1996. In plain terms, if you are a U.S. person who receives a large gift or inheritance from someone abroad, transfers assets to a foreign trust, or receives a distribution from one, the Notice requires you to file Form 3520, and in some cases Form 3520-A, with the IRS.1Internal Revenue Service. IRS Bulletin No. 1997-25 – Notice 97-34 The forms are informational, not tax returns, but missing them carries some of the harshest civil penalties in the Internal Revenue Code: up to 35% of the amount involved, plus continuing penalties that accrue every 30 days once the IRS writes to you.
The reporting falls into three buckets under IRC Sections 6048 and 6039F: foreign gifts and bequests, transfers to foreign trusts, and distributions from foreign trusts. Each has its own threshold, its own section of Form 3520, and its own penalty formula.
Who Has to File
The duty to file lands on the U.S. person on the receiving or transferring end. “U.S. person” is broader than citizenship. It covers U.S. citizens wherever they live, resident aliens who hold a green card or meet the substantial presence test, and domestic partnerships, corporations, estates, and trusts.2Internal Revenue Service. Classification of Taxpayers for U.S. Tax Purposes A U.S. citizen who has lived abroad for forty years is still a U.S. person for these purposes.3Internal Revenue Service. Foreign Persons
The foreign donor, foreign trust, or foreign trustee has no filing obligation of their own. That is the whole design: the IRS cannot reach them, so it puts the reporting burden on the U.S. recipient.
Reporting Gifts and Bequests from Abroad
Gifts and inheritances from foreign individuals or foreign estates are reported on Part IV of Form 3520 once the total from a single foreign source exceeds $100,000 in a calendar year.4Internal Revenue Service. Reporting Foreign Gifts and Bequests Foreign gifts themselves are generally not taxable income to the recipient. The filing exists so the IRS can confirm the money is really a gift and not disguised compensation, a trust distribution, or something else that would be taxable.
A few mechanics to watch:
- Once you cross $100,000 from a single foreign person, you must separately identify every gift from that person worth more than $5,000.
- The $100,000 figure is per foreign person, per year, aggregated across multiple gifts from the same donor.
- Gifts from related foreign persons are aggregated. If a foreign parent gives you $60,000 and a foreign sibling gives you $50,000, those amounts may need to be combined.
Gifts from foreign corporations and foreign partnerships use a much lower threshold. For tax year 2025, the combined threshold for all such entity gifts was $20,116, and it adjusts annually for inflation.5Internal Revenue Service. Rev. Proc. 2024-40 Unlike the individual threshold, this one applies to the aggregate from all foreign entities together. The IRS uses the lower limit because an entity “gift” is more likely to be a dividend, a disguised wage, or some other taxable payment.
One important boundary: if the money comes from a foreign trust, it is a trust distribution, not a gift, even if the trustee describes it that way. Trust distributions belong on Part III, not Part IV, and the two have very different penalty consequences.
Reporting Transfers to a Foreign Trust
Any transfer of money or property to a foreign trust is reported on Part I of Form 3520.6Internal Revenue Service. Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts There is no dollar threshold. Creating a new foreign trust, adding assets to an existing one, or a transfer that occurs at death through your estate all trigger the filing.
Part I also captures ownership. If you are treated as the owner of any part of a foreign trust under the grantor trust rules, you report that status here. People who transferred assets abroad while keeping certain powers over income or principal often qualify as owners without realizing it.
Reporting Distributions from a Foreign Trust
Every distribution from a foreign trust goes on Part III, regardless of size.4Internal Revenue Service. Reporting Foreign Gifts and Bequests A $500 distribution is reportable just like a $500,000 one. “Distribution” covers both income and principal.
Two situations that don’t look like distributions are treated as distributions anyway. A loan of cash or marketable securities from a foreign trust counts as a distribution unless it meets strict qualified-obligation requirements, including a written agreement, a term no longer than five years, U.S. dollar denomination, a market interest rate tied to the applicable federal rate, an extended assessment period, and annual reporting on Form 3520.7eCFR. 26 CFR 1.679-4 – Exceptions to General Rule Using trust property without paying fair market value, such as living rent-free in a trust-owned vacation home, likewise creates a deemed distribution equal to fair rental value.8Internal Revenue Service. Instructions for Form 3520
How a distribution is characterized matters. If the foreign trustee does not provide a Foreign Grantor Trust Beneficiary Statement, the IRS presumes the whole distribution is an accumulation distribution and applies the throwback rules of IRC Section 668, which tax the income as if received in prior years and add an interest charge running from those years forward.9Office of the Law Revision Counsel. 26 USC 668 – Interest Charge on Accumulation Distributions From Foreign Trusts On a trust with a decade of accumulated income, the interest charge alone can exceed the base tax. Getting a proper beneficiary statement before filing is one of the most valuable things you can do.
Form 3520-A and the U.S. Owner’s Substitute Filing
When you are the U.S. owner of a foreign trust, a second form applies. The trust itself must file Form 3520-A each year, reporting its income, expenses, and beneficiary information.10Internal Revenue Service. About Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner You are responsible for making sure that happens, and you still file your own Form 3520 separately.
Foreign trustees frequently refuse or forget. If yours does, you must prepare and attach a substitute Form 3520-A to your own Form 3520 by the Form 3520 due date, complete with the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement, and share copies with any other U.S. owners and U.S. beneficiaries.11Internal Revenue Service. Instructions for Form 3520-A The substitute is not optional. If no one files, the penalty for the trust’s failure falls on you.
Deadlines and Where to File
Form 3520 is due by the 15th day of the fourth month after the end of your tax year, which is April 15 for most calendar-year individuals. An extension of your Form 1040 automatically extends Form 3520 to October 15; there is no separate extension form.12Internal Revenue Service. Reminder to U.S. Owners of a Foreign Trust
Form 3520-A runs on a different clock. The trust must file by the 15th day of the third month after its tax year ends: March 15 for a calendar-year trust. If a substitute is needed, it is due with your Form 3520, including any extension.
Both forms are paper-filed. Electronic filing is not available as of the December 2025 instructions. Form 3520 goes separately from your Form 1040, mailed to:
Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 844098Internal Revenue Service. Instructions for Form 3520
Bundling the form with your 1040 or sending it to the wrong address can cause the IRS to treat it as unfiled, which starts the penalty clock.
Penalties for Missing a Filing
Penalties under IRC Section 6677 depend on which part of the form you missed:
- Foreign gifts and bequests on Part IV: 5% of the gift per month, capped at 25% of the total.4Internal Revenue Service. Reporting Foreign Gifts and Bequests
- Transfers to a foreign trust on Part I: the greater of $10,000 or 35% of the gross value of the property transferred.13Office of the Law Revision Counsel. 26 USC 6677 – Failure to File Information With Respect to Certain Foreign Trusts
- Distributions from a foreign trust on Part III: the greater of $10,000 or 35% of the gross distribution.
- Form 3520-A: the greater of $10,000 or 5% of the gross value of the trust assets you are treated as owning.
If the failure continues 90 days after the IRS mails you a notice, an additional $10,000 accrues for every 30 days (or fraction thereof) that it continues. These continuation penalties stack on the initial amount, though the total cannot exceed the gross reportable amount. On a $2 million trust, the initial 35% penalty alone can hit $700,000, and continuation penalties pile on from there.
The statute of limitations does not start running until you file a complete and accurate form. The IRS treats the assessment window as open indefinitely for forms that were never filed; once you do file, it generally has three years from the filing date to assess.14Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties Waiting does not run out the clock; it only pauses it.
Reasonable Cause and the 2024 Policy Change
No penalty applies if the failure was due to reasonable cause and not willful neglect, but the burden is on you to prove it. The statute specifically excludes one argument: being subject to foreign civil or criminal penalties for disclosing the information is not reasonable cause. Reasonable cause statements must be in writing and signed under penalties of perjury, and separate arguments may be needed for the initial penalty and any continuation penalties, because the question shifts from “why did you miss the deadline” to “why did you still not file after the IRS told you to.”
For years the IRS assessed penalties automatically on late-filed Forms 3520 and 3520-A without first reading the taxpayer’s reasonable cause statement. That changed in late 2024. The IRS announced it would stop automatically assessing penalties on late-filed Part IV foreign gift and bequest reports and would review reasonable cause statements before assessing Section 6677 penalties on the trust portions.15Taxpayer Advocate Service. IRS Hears Concerns from TAS and Practitioners, Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties A well-drafted reasonable cause statement attached to a late filing can now prevent assessment in the first place, rather than requiring a fight for abatement after the fact.
Catching Up on Missed Years
Two IRS programs handle prior-year failures.
The Delinquent International Information Return Submission Procedures let you file late forms with a reasonable cause statement if the IRS has not yet contacted you about the missing returns.16Internal Revenue Service. Delinquent International Information Return Submission Procedures Penalties can still be assessed, and the IRS may not consider your statement until after processing, so it is a channel for coming into compliance rather than a safe harbor.
The Streamlined Filing Compliance Procedures offer more concrete relief for non-willful failures. Under the domestic version, you file amended returns for the most recent three years with the required information returns and pay a miscellaneous offshore penalty, and the IRS waives accuracy-related penalties, information return penalties, and FBAR penalties.17Internal Revenue Service. U.S. Taxpayers Residing in the United States The program requires a certification under penalties of perjury that the failure was not willful. A later IRS finding of willfulness or fraud removes the protections.
Choosing between the two depends on whether you can credibly certify non-willfulness, how many years you’ve missed, and whether the IRS has already written to you. Given that a single missed form can produce penalties in the five or six figures, this is one area where tax counsel earns its fee before the first page is drafted.