Form 3520 — Reporting Foreign Trusts, Gifts and Inheritances for Americans in Japan

If you’re an American living in Japan and you receive a large gift from a Japanese relative, inherit money from a Japanese family member, or have an interest in certain Japanese financial arrangements that may be classified as foreign trusts, you may need to file Form 3520 with the IRS.

Form 3520, officially “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” is an information return that catches many Americans in Japan off guard. The filing triggers are broader than most people expect, and the penalties for non-compliance are substantial.

This article is general information for US taxpayers living in Japan and is not tax, legal, or accounting advice. Whether a particular Japanese arrangement constitutes a “foreign trust” for US tax purposes is a fact-specific legal determination. Consult a qualified tax professional for your situation.

What Is Form 3520?

Form 3520 is an information return — not a tax return — filed by US persons to report:

1. Transactions with foreign trusts (Part I and Part III) — creating, transferring property to, or receiving distributions from a foreign trust
2. Ownership of foreign trusts (Part II) — being treated as the US owner of a foreign trust under the grantor trust rules
3. Large gifts or bequests from specified foreign persons (Part IV) — receiving amounts above the applicable threshold from nonresident alien individuals, foreign estates, foreign corporations, or foreign partnerships. Amounts received from foreign trusts are generally addressed under Part III instead

The form itself does not create a tax liability. However, the underlying transactions (such as trust distributions) may be taxable, and failure to file the form triggers separate penalties. Note that amounts received from a foreign trust are generally reported in Part III (foreign trust distributions), not Part IV (foreign gifts).

Form 3520 is filed separately from your income tax return. Follow the current Form 3520 instructions for the filing method and address, even when the due date is extended through an income-tax-return extension.

Source: IRS — About Form 3520 | IRS — Instructions for Form 3520

Part 1: Foreign Trust Reporting

When Does a Japanese Arrangement Become a “Foreign Trust”?

Under US tax law, a “trust” is determined by analyzing the arrangement under Treas. Reg. §§301.7701-2 and 301.7701-4. The IRS distinguishes between business entities and trusts based on the substance of the arrangement. An arrangement called a “trust” under Japanese law is not automatically a trust for US tax purposes, and vice versa.

Japanese arrangements that may require analysis include:

• Investment trusts (投資信託) — Japanese mutual funds are structured as trusts under Japanese law, but their US classification requires analysis under the entity-classification regulations. In practice, the primary US tax issue for Japanese investment trusts is often their classification as PFICs (reported on Form 8621) rather than Form 3520 reporting
• Certain pension arrangements — Some employer pension plans or individual arrangements may have trust characteristics. However, Rev. Proc. 2020-17 and the current Form 3520 instructions provide reporting exemptions for certain tax-favored foreign retirement and nonretirement trusts that meet specified criteria. Check whether your arrangement qualifies for an exemption before concluding that Form 3520 is required
• Formal trust arrangements (信託) — Family trusts, testamentary trusts, or other formal trust structures established under Japanese trust law

What Must Be Reported?

If you have reportable transactions with a foreign trust, Form 3520 requires information about:

• Transfers of money or property to the trust (Part I)
• Distributions received from the trust (Part III)
• Your status as a US owner of the trust under the grantor trust rules (Part II), if applicable. A US owner generally completes Part II for each year of ownership even if there were no trust transactions during that year

Form 3520-A

If you are treated as the US owner of a foreign trust, the US owner is responsible for ensuring that the foreign trust files Form 3520-A (Annual Information Return of Foreign Trust With a US Owner) and provides the required annual statements to US owners and US beneficiaries.

Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s tax year (March 15 for calendar-year trusts). Extensions may be requested using Form 7004. This deadline is separate from the Form 3520 deadline — an extension of your Form 1040 does not automatically extend the Form 3520-A due date.

If the foreign trust fails to file Form 3520-A, the US owner must complete and attach a substitute Form 3520-A to their Form 3520 (filed by the Form 3520 due date).

Source: IRS — Foreign Trust Reporting Requirements and Tax Consequences | IRS — Rev. Proc. 2020-17

Part 2: Reporting Large Foreign Gifts and Inheritances

This is the more common trigger for Americans in Japan. If you receive a gift or bequest above the applicable threshold from a nonresident alien individual, foreign estate, foreign corporation, or foreign partnership, you may need to report it on Form 3520, Part IV. Foreign trust distributions follow the separate Part III rules discussed above.

Reporting Thresholds

Key points:

• The $100,000 test applies to amounts received from a particular nonresident alien individual or foreign estate, including foreign persons related to that individual or estate. It is an annual aggregate test, not a per-transaction test
• Once the threshold is exceeded, each gift or bequest over $5,000 must be separately identified on the form
• For the annually adjusted entity threshold, aggregate purported gifts received from foreign corporations, foreign partnerships, and foreign persons you know or have reason to know are related to those entities
• Both gifts (during the donor’s lifetime) and bequests (from a deceased person’s estate) are reportable
• The reporting is informational — receiving a foreign gift generally does not create US income tax liability for the recipient, though there are exceptions (such as certain gifts or bequests from covered expatriates under IRC §2801, which may be subject to tax and reported on Form 708)

Common Scenarios for Americans in Japan

• Inheritance from a Japanese parent — If your Japanese parent passes away and you inherit more than $100,000 (from the parent’s estate and related foreign persons in aggregate), you must report the bequest on Form 3520. Note that Japanese inheritance tax (相続税) is a separate obligation under Japanese law
• Gift from a Japanese spouse or relative — If your spouse is a nonresident alien, gifts you receive from that spouse are generally tested under the Form 3520 rules for gifts from a nonresident alien. More than $100,000 received during the year from that spouse and related foreign persons may trigger Part IV reporting. This reporting threshold is separate from the US gift-tax annual exclusion for gifts made to a non-US-citizen spouse

Source: IRS — Gifts from Foreign Person

Penalties

Form 3520 penalties are substantial and differ by the type of reporting failure:

Foreign Gift or Bequest Penalties (IRC §6039F)

• 5% of the gift or bequest amount for each month (or partial month) the form is not filed, up to a maximum of 25%

Foreign Trust Penalties (IRC §6677)

Under IRC §6677, the initial penalty for each foreign-trust reporting failure is generally the greater of $10,000 or the applicable percentage, unless reasonable cause is established:

• Failure to report a transfer to a foreign trust (Part I): the greater of $10,000 or 35% of the gross reportable amount
• Failure to report a distribution from a foreign trust (Part III): the greater of $10,000 or 35% of the gross distribution
• Failure to report ownership of a foreign trust / Form 3520-A non-compliance (Part II): the greater of $10,000 or 5% of the gross value of the trust assets treated as owned by the US person
• If the failure continues for more than 90 days after IRS notification, additional continuation penalties may apply

Source: IRS — Instructions for Form 3520, Penalties | IRS — International Information Reporting Penalties

Filing Deadlines

• The automatic 2-month extension for qualifying taxpayers who live and work outside the United States (to June 15) generally applies to Form 3520 as well, subject to the conditions in the Form 3520 instructions
• Form 3520 is filed separately from your Form 1040 — follow the current instructions for the filing method and address

Practical Considerations for Americans in Japan

Japanese Inheritance Tax and US Reporting

Japan and the US both may impose obligations when you inherit from a Japanese person. Japanese inheritance tax (相続税) is imposed on the recipient under Japanese law. For US purposes, the inheritance itself is generally not taxable income, but it must be reported on Form 3520 if it exceeds $100,000 from the decedent’s estate and related persons. Any income subsequently earned on the inherited assets (interest, dividends, gains) is US-taxable.

Valuation and Currency Conversion

Report the fair market value of gifts and bequests in US dollars. Use a reasonable exchange rate for the date of the gift or bequest. For assets other than cash, determining fair market value may require appraisals, particularly for Japanese real estate or business interests.

Inherited Property and Related Reporting

Inheriting Japanese property may trigger related reporting obligations:

• FBAR (FinCEN Form 114) — If inherited assets include foreign financial accounts that push your aggregate balance above $10,000. Note: directly held foreign real estate is generally not reportable on the FBAR
• Form 8938 (FATCA) — If inherited foreign financial assets exceed the applicable threshold. Directly held foreign real estate is generally not a specified foreign financial asset, but interests in foreign entities holding real estate may be
• Form 3520-A — If you are treated as the US owner of a foreign trust
• Form 8621 — If inherited assets include PFICs (such as Japanese investment trusts)

What If You Haven’t Been Filing?

If you received large gifts or inheritances from foreign persons and didn’t file Form 3520, you may have options:

• Streamlined Filing Compliance Procedures — These procedures may be relevant only when the taxpayer independently satisfies all eligibility requirements, including the required non-willfulness certification and the applicable failures involving foreign financial assets, income, and tax. They are not a general-purpose penalty waiver for a stand-alone delinquent Form 3520. Review all requirements carefully before applying
• Delinquent International Information Return Submission — Taxpayers who are not under examination or criminal investigation generally file delinquent Forms 3520 and 3520-A following the instructions for each form (note: these forms are not attached to Form 1040). A reasonable-cause statement may be attached, but penalties may still be assessed initially and reasonable cause may need to be raised again in response to IRS correspondence

Given the magnitude of Form 3520 penalties — up to 25% of an unreported foreign gift, the greater of $10,000 or 35% for certain unreported trust transfers or distributions, and the greater of $10,000 or 5% for certain owner-reporting failures — getting compliant is important. Consult a tax professional before filing delinquent forms.

Source: IRS — Streamlined Filing Compliance Procedures | IRS — Delinquent International Information Return Submission Procedures

Frequently Asked Questions

My Japanese parent gave me ¥15,000,000. Do I need to file Form 3520?

If your parent is a nonresident alien and the gift exceeds $100,000 in aggregate during the tax year (from that parent and related foreign persons, converted using a reasonable exchange rate), you must report it on Form 3520, Part IV. The gift itself is generally not US taxable income, but the reporting requirement still applies.

I inherited a house in Japan. Is that reportable?

If the fair market value of the bequest exceeds $100,000 (from the estate and related foreign persons in aggregate), you must report it on Form 3520. The inheritance itself is generally not US taxable income. Directly held foreign real estate is generally not reportable on the FBAR or Form 8938, but foreign financial accounts associated with the inheritance, and any interests in foreign entities holding the property, may trigger separate reporting. Any rental income or gain on a later sale would be US-taxable.

Do I need to file Form 3520 for my Japanese investment trusts?

The answer depends on whether the specific investment trust is classified as a “foreign trust” for US tax purposes under the entity-classification regulations. In practice, the primary US tax issue for Japanese investment trusts is often their classification as PFICs (reported on Form 8621). Certain foreign retirement and nonretirement trusts may also be exempt from §6048 reporting under Rev. Proc. 2020-17. This is a fact-specific determination that requires professional analysis.

My Japanese company paid me a retirement bonus (退職金). Is that a “gift”?

Generally no. Retirement bonuses from an employer are compensation for services, not gifts. They are taxable as income, not reported as foreign gifts on Form 3520, Part IV. However, the characterization depends on the facts and circumstances of the payment.

Next Steps

• US Tax Filing Obligations — The complete overview
• FBAR Filing — Report your Japanese financial accounts
• Form 5471 — If you own a Japanese company
• PFICs and Form 8621 — Japanese investment funds and US tax reporting (coming soon)
• Streamlined Filing — How to catch up if you haven’t been filing (coming soon)