IRS Notice 97-34: Foreign Trust Reporting, Form 3520, Penalties

IRS Notice 97-34 sets out the foreign trust and gift reporting rules that require U.S. persons to file Form 3520, and in some cases Form 3520-A, whenever they receive a large gift from a foreign source, transfer property to a foreign trust, receive a distribution from one, or are treated as the owner of one.¹ The notice implemented the reporting provisions Congress added in the Small Business Job Protection Act of 1996 under IRC Sections 6048 and 6039F. Three categories of transactions trigger filing: foreign gifts and bequests, transfers to foreign trusts, and distributions from foreign trusts. Each has its own threshold, its own part of Form 3520, and its own penalty structure. Miss any of them and the civil penalties can reach 35% of the amount involved.

The obligation always sits on the U.S. side. A U.S. person is anyone treated as such for federal tax purposes: U.S. citizens (including those living abroad), resident aliens who hold a green card or meet the substantial presence test, and domestic partnerships, corporations, estates, and trusts.² The foreign donor, foreign trust, or foreign trustee has no filing duty of its own. The IRS has no way to see these transactions unless the U.S. recipient reports them, which is why the penalties are structured to make silence expensive.

Reporting Foreign Gifts and Bequests

Gifts and inheritances from foreign persons go on Part IV of Form 3520. Reporting is required once the total received from a single foreign individual or foreign estate exceeds $100,000 in a calendar year.³ Foreign gifts are generally not taxable income. The filing exists so the IRS can confirm that the money is actually a gift and not disguised compensation, a trust distribution, or something else.

Once the $100,000 threshold is crossed, you must separately identify each individual gift worth more than $5,000. The threshold is per foreign person, not per gift, and it aggregates gifts from related foreign persons. If your foreign parent gives you $60,000 and your foreign sibling gives you $50,000 in the same year, those amounts may need to be combined when the donors are treated as related parties.

Gifts from Foreign Corporations and Partnerships

The threshold is far lower for gifts from foreign entities. For tax year 2025, the aggregate figure for all gifts received from foreign corporations and foreign partnerships combined was $20,116, and it adjusts each year for inflation.⁴ Unlike the $100,000 per-person threshold, this limit applies to the total received from all such entities during the year. The IRS uses the lower threshold because entity “gifts” are more likely to mask compensation, dividends, or other taxable income.

Gifts vs. Trust Distributions

Part IV covers gifts and bequests from foreign individuals, estates, corporations, and partnerships only. Money from a foreign trust is a trust distribution, not a gift, even if the trustee describes it that way. Trust distributions belong on Part III and follow different rules with a different penalty structure. Filing a trust distribution as a gift on Part IV is a common and costly misclassification.

Transfers to a Foreign Trust

Transfers of money or property to a foreign trust go on Part I of Form 3520.⁵ Creating a new foreign trust, adding assets to an existing one, or making a transfer that occurs by reason of death are all reportable. There is no dollar threshold. Any transfer triggers reporting.

Part I also covers ownership. If you are treated as the owner of any portion of a foreign trust under the grantor trust rules, you disclose that here. The grantor trust rules can apply even when you don’t think of yourself as the trust’s owner, which catches more filers than expected.

Distributions from a Foreign Trust

Every distribution from a foreign trust is reportable on Part III, no matter how small. A $500 distribution is reportable the same way as a $500,000 one. Distribution includes both income and principal.³

Loans and Use of Trust Property Count as Distributions

A foreign trust that lends you cash or marketable securities is treated as making a distribution unless the loan is a “qualified obligation.” That rule applies whether the loan is direct or indirect, and it covers loans to you, your beneficiaries, or related persons. To qualify as a genuine loan rather than a deemed distribution, the obligation must satisfy all six requirements:

Documented in an express written agreement.
Term of no more than five years.
All payments denominated in U.S. dollars.
Yield between 100% and 130% of the applicable federal rate on the date the obligation is issued.
Consent to extend the IRS’s assessment period to at least three years after the loan matures.
Annual reporting on Form 3520 of the loan’s status, including principal and interest payments, for every year it remains outstanding.

Miss any one of those and the entire loan amount is treated as a taxable distribution.⁶ Using trust property without paying fair market value counts as well. Living in a foreign trust’s vacation home rent-free creates a reportable distribution equal to the property’s fair rental value.⁷

The Throwback Tax

How a distribution gets classified controls how much tax you owe. A distribution can be current-year income, accumulated income from prior years, or a return of principal. If the foreign trustee does not give you a Foreign Grantor Trust Beneficiary Statement, the IRS presumes the entire distribution is an accumulation distribution and applies the throwback rules under IRC Section 668.⁸ The accumulated income is taxed as if received in the years the trust earned it, plus an interest charge at the IRS underpayment rate running from those earlier years through the year of distribution. On a trust that has been accumulating income for a decade, the interest charge alone can exceed the tax. Getting a proper beneficiary statement before filing is one of the most valuable things you can do.

Form 3520-A and Substitute Filings

If you are treated as the owner of a foreign trust, the trust itself must file Form 3520-A, reporting its income, expenses, and beneficiaries.⁹ As U.S. owner, you are responsible for making sure that happens, and you separately file your own Form 3520 with the ownership box checked in Part I.

Getting a foreign trustee to file an IRS form is often difficult. If the trustee refuses or fails to file, you must complete and attach a substitute Form 3520-A to your own Form 3520 by the Form 3520 due date.¹⁰ The substitute must include the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement, and copies must go to any other U.S. owners and U.S. beneficiaries. Filing the substitute is not optional. If neither the trustee nor you files, you absorb the penalty for the trust’s failure.

Deadlines and Where to File

Form 3520 is due by the 15th day of the fourth month after your tax year ends, which is April 15 for most individuals. An extension of your Form 1040 automatically extends Form 3520 to October 15. There is no separate extension form.¹¹

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, which is March 15 for a calendar-year trust. If a substitute is needed, it is due with your Form 3520, including extensions.

Both forms are paper-filed. As of the December 2025 instructions, electronic filing is not available. Mail them, separately from your Form 1040, to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.⁷ Sending Form 3520 to the wrong address or bundling it with your income tax return can cause the IRS to treat it as unfiled and start the penalty clock.

Penalties

The penalties under IRC Section 6677 depend on which part of the form you missed:

Foreign gifts and bequests (Part IV): 5% of the gift amount per month the failure continues, capped at 25%.³
Transfers to a foreign trust (Part I): the greater of $10,000 or 35% of the gross value transferred.¹²
Distributions from a foreign trust (Part III): the greater of $10,000 or 35% of the gross amount distributed.
Form 3520-A: the greater of $10,000 or 5% of the gross value of the trust assets treated as owned by the U.S. person.

The initial penalty is not the end. If the failure continues 90 days after the IRS mails notice of it, an additional $10,000 accrues for every 30 days (or fraction) that the failure continues, stacking on top of the initial penalty. The total is capped at the gross reportable amount. On a $2 million trust, the initial 35% penalty alone reaches $700,000, and continuation penalties keep running until you comply or hit the cap.

The statute of limitations doesn’t start until you file a complete and accurate return. The IRS treats an unfiled Form 3520 or 3520-A as leaving the assessment window open indefinitely.¹³ Once you file, the IRS generally has three years from that date to assess penalties. Waiting does not run out the clock; it pauses it.

Reasonable Cause

No penalty applies if the failure was due to reasonable cause and not willful neglect, and the burden is on you. The statute specifically rules out one common excuse: being subject to a foreign country’s civil or criminal penalties for disclosing the information does not qualify as reasonable cause. A reasonable cause statement must be in writing and signed under penalties of perjury, and the IRS evaluates it on all the facts and circumstances. Separate arguments may be needed for the initial penalty and any continuation penalties, because the relevant question is different for each: why you didn’t file on time versus why you still hadn’t filed after the IRS told you to.

In late 2024 the IRS changed a long-standing practice. It announced it would stop automatically assessing penalties on late-filed Forms 3520, Part IV, and would begin reviewing reasonable cause statements before assessing Section 6677 penalties on the trust portions of the form.¹⁴ Under the old approach, taxpayers received a penalty notice first and fought for abatement afterward. A well-drafted reasonable cause statement attached to a late filing may now prevent the penalty from being assessed in the first place.

Fixing Missed Prior-Year Filings

Two IRS programs exist for taxpayers who need to catch up.

Under the Delinquent International Information Return Submission Procedures, you file the late Forms 3520 and 3520-A according to the instructions and attach a reasonable cause statement.¹⁵ Penalties may still be assessed, and the IRS may not read the statement until after processing. It is a channel for coming into compliance, not a safe harbor, but filing before the IRS contacts you strengthens any reasonable cause argument.

The Streamlined Filing Compliance Procedures provide more concrete relief where the failure was non-willful. Under the domestic offshore version, you file amended returns for the most recent three years along with all required information returns, including Forms 3520 and 3520-A. In exchange, only the miscellaneous offshore penalty applies; accuracy-related, information return, and FBAR penalties do not.¹⁶ Streamlined requires a certification of non-willfulness under penalties of perjury, and if the IRS later finds the conduct was willful or fraudulent, the protection disappears.

Choosing between the two turns on whether you can credibly certify non-willfulness, how many years you have missed, and whether the IRS has already contacted you. Given how quickly the penalties on a single unfiled form can climb into five and six figures, professional advice before filing is worth the cost.

1
Internal Revenue Service. IRS Bulletin No. 1997-25 – Notice 97-34
2
Internal Revenue Service. Classification of Taxpayers for U.S. Tax Purposes
3
Internal Revenue Service. Reporting Foreign Gifts and Bequests
4
Internal Revenue Service. Rev. Proc. 2024-40
5
Internal Revenue Service. Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
6
eCFR. 26 CFR 1.679-4 – Exceptions to General Rule
7
Internal Revenue Service. Instructions for Form 3520
8
Office of the Law Revision Counsel. 26 USC 668 – Interest Charge on Accumulation Distributions From Foreign Trusts
9
Internal Revenue Service. About Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
10
Internal Revenue Service. Instructions for Form 3520-A
11
Internal Revenue Service. Reminder to U.S. Owners of a Foreign Trust
12
Office of the Law Revision Counsel. 26 USC 6677 – Failure to File Information With Respect to Certain Foreign Trusts
13
Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties
14
Taxpayer Advocate Service. IRS Hears Concerns from TAS and Practitioners, Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties
15
Internal Revenue Service. Delinquent International Information Return Submission Procedures
16
Internal Revenue Service. U.S. Taxpayers Residing in the United States