Foreign gift tax: reporting rules, Form 3520 & 2025 updates
If you receive a large gift or inheritance from someone abroad, you might wonder if you owe tax. In most cases, you don’t – but you may need to report it to the IRS using Form 3520. This guide explains what the foreign gift tax really means, when you must report, how the rules work in 2025, and what recent laws like the One Big Beautiful Bill Act and Section 2801 may change.
This article is brought to you by Taxes for Expats (TFX) – the trusted team helping Americans abroad stay compliant with foreign gift reporting and IRS rules. Did you receive a gift or inheritance from someone abroad and need guidance on reporting and taxes? We're here to help – learn more about our services or contact us.
Key takeaways
Here’s a quick scan for foreign gift reporting, thresholds, and 2025 changes:
- The IRS focuses on disclosure, not recipient taxation – missing Form 3520 can trigger 5% per month, up to 25% penalties under Section 6039F.
- Form 3520, Part IV applies at $100,000 from foreign individuals/estates and $20,116 from foreign corporations/partnerships in 2025.
- Form 3520 is due with your tax return (extensions apply), but it must be filed separately from your 1040. The IRS stresses the Form 3520 due date is not tied to the 1040, even though the calendar dates often align.
Foreign gifts – definition, scope, rules
A foreign gift is money or property from someone who is not a US person that the recipient treats as a gift or bequest. If you receive a gift from a foreign person, given out of generosity, with no expectation of anything in return – then it’s treated as a gift for tax purposes. But if it was in exchange for services, goods, or any benefit, then it's not a gift and could be considered taxable income instead. This definition underpins Form 3520 reporting, separate from income taxation.
A foreign person can be a nonresident alien or a foreign estate, and it also includes a foreign corporation or partnership. The IRS instructions apply when a recipient “treats as a gift” amounts from these counterparties. They also flag “purported gifts from foreign corporations or foreign partnerships” that may be recharacterized.
Common examples include a wire from parents abroad to help with a home purchase. An inheritance of cash or property from a foreign estate also qualifies. Transfers of stock, crypto, or personal assets from nonresident relatives or frequent gifts from abroad all qualify, too.
Are foreign gifts tax-free?
Money or property received from a non-US person is generally treated as a gift and excluded from income under Section 102. But IRS reporting obligations still apply depending on the type of donor and total value received. In practice, the issue “are foreign gifts taxable?” is settled by law – gifts are not taxed to the recipient, but reporting duties apply at specific limits outlined below.
- For entity transfers, the foreign gift tax limit 2025 is $20,116 in aggregate from foreign corporations or partnerships – cross it and Part IV reporting is required.
- For individuals or foreign estates, reporting applies when the total received exceeds $100,000 during the taxable year, with related donors combined.
- When Form 3520 is required, you must identify each gift in excess of $5,000 on line 54, listing date, description, and fair market value.
Reporting foreign gifts – what to file
Form 3520 is the IRS gateway for disclosing substantial cross-border gifts. Its full name – “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” – makes clear that the job is reporting. Below are the filing triggers and how to itemize entries.
Who must file – the bright-line triggers
US citizens and residents file when gifts from foreign individuals or estates exceed $100,000 during the taxable year. For transfers from foreign corporations or partnerships, the 2024 trigger is $19,570 (indexed annually); when reporting, list each item over $5,000 in Part IV.
Gifts from covered expatriates – new 2025 tax rule
Some foreign gifts trigger more than just Form 3520. If the donor is a covered expatriate, the US recipient pays a transfer tax under section 2801, starting with gifts and bequests received on or after January 1, 2025. This applies in addition to regular reporting – meaning you may need both Form 3520 and the new Form 708.
The tax is calculated on the gift amount minus the annual exclusion (set at $19,000 for 2025), then taxed at the highest estate/gift rate, currently 40%. For trusts, a domestic trust pays directly, while foreign trusts shift liability to US beneficiaries through the 2801 ratio. Filing is due by the 15th day of the 18th month after the year of receipt, with a six-month extension available.
Why this matters – say you inherit €600,000 in 2025 from an uncle who gave up US citizenship and meets the “covered expatriate” test. You would compute the section 2801 tax on Form 708 and still file Form 3520 to meet your foreign gift reporting obligations.
What happens if you don’t report gifts
Missing the required disclosure can turn a generous transfer into a compliance problem – with real penalties attached. Below you’ll see the IRS definition, the penalty mechanics, and a recent federal case that shows how enforcement plays out in practice.
The IRS definition and penalty formula
Form 3520 exists to track foreign financial relationships. The IRS specifically says it applies when a taxpayer “fails to report transactions with foreign trusts and receipt of certain foreign gifts.” If you miss the filing, an assessable penalty of 5% per month applies to the value of the unreported gift, capped at 25%. In addition, the IRS can determine the income tax consequences of the transfer at its discretion – which may not be favorable to you.
Shift in enforcement approach
As of 2024, the IRS updated its internal processing manual to stop automatic penalty assessments for late or missing Form 3520 filings. But this shift does not remove the penalty law – it simply means penalties are now assessed manually. The rules under Section 6039F still apply, and penalties can still be enforced through notice and demand procedures.
A real case: Huang v. United States
In the 2024 case, Huang v. United States, a taxpayer failed to report a foreign gift and was hit with a $36,495.50 penalty. She claimed she relied on tax software that didn’t mention Form 3520, and the court allowed her reasonable cause argument to proceed. However, other claims were dismissed, and she still had to pay penalties, interest, and legal costs.
Exemptions for foreign gift reporting
Not every transfer from abroad triggers Form 3520 – before you file, scan these carve-outs. This list sits between the thresholds you’ve seen earlier and the penalties section, so you can decide quickly whether a disclosure is required.
Under the filing thresholds
No Part IV filing is needed if your total receipts stay below $100,000 from foreign individuals or estates, or $20,116 from foreign corporations or partnerships in 2025. These thresholds apply per calendar year and are based on aggregate gifts from related parties.
Tuition or medical bills paid directly
If a foreign donor pays a school or hospital directly, that amount is considered a qualified transfer and is excluded from gift classification. This applies regardless of size and avoids Form 3520 altogether.
Distributions from a foreign trust
Amounts received from a foreign trust are not foreign gifts under §6039F. Instead, they are reported under Part III of Form 3520 as trust distributions, which follow separate rules and documentation.
Not actually a gift
Transfers that are bona fide loans, repayments, or compensation for services are not treated as gifts. The key is intent and documentation – if repayment is expected or services were provided, the IRS won’t view it as a gift.
Gifts from US persons
If the donor is a US citizen, green card holder, or domestic entity, Form 3520’s foreign gift reporting rules don’t apply. This remains true even if the money was wired from an overseas account, as the donor's tax status controls.
NOTE! The OBBBA (2025) raises the lifetime estate/gift exclusion to $15M starting in 2026, but it does not change the 2025 Form 3520 thresholds.
Expert help when foreign gifts get complex
Navigating foreign gift tax rules can be straightforward when amounts are small – but once you cross key thresholds or receive funds from a trust or expatriate, the reporting stakes rise fast. Timely filing, accurate classification, and choosing the correct IRS forms are what keep gifts from becoming penalties.
That’s where Taxes for Expats comes in – our team specializes in helping Americans abroad manage IRS compliance. From preparing Form 3520 to analyzing whether Section 2801 applies, we ensure every foreign transfer is documented the right way.
FAQ
No genuine gifts from non-US persons aren’t income, but you may need to file Form 3520 if yearly thresholds are met.
Generally, no inheritances aren’t income, though large amounts can trigger Form 3520 and, if the decedent was a covered expatriate, section 2801 may apply.
File promptly with a clear, reasonable-cause statement and supporting documents to seek penalty relief.
Often yes a US recipient may need Form 3520 once totals from a non-US spouse exceed the threshold, separate from any donor-side Form 709 rules.
Usually yes sending money isn’t taxed itself, but a US donor may need Form 709 if the gift exceeds the annual exclusion, and transfer reporting may apply.
Yes through FATCA data, bank reports, FBAR filings, and cross-checks against Form 3520 and return information.
No it’s typically not taxable, though Form 3520 reporting can be required when totals from foreign parents cross the annual threshold.
