Form 3520

[AccTaxMan]

Taxpayer borrowed a loan from his parents in a foreign country to buy a house. The loan amount is about $150,000.00 and was remitted to him from oversea in 2010. Is Form 3520 (or other tax forms) required under this situation?

[Koss]

Foreign Person

Answer hinges on whether his parents are a "foreign person."

So he received a wire transfer, or something like that, which originated from a bank account in a foreign country.

Who owns the bank account in the foreign country?

One or both of his parents, based on the information you provided.

Is the parent (or parents) who owns that bank account a US citizen or resident alien?

If so, then he doesn't have to file Form 3520.

The question is not where the money came from, but rather who it came from.

If his father is a nonresident alien, and his father gives him a gift of $150,000, then he would have to file Form 3520 even if the money originated from a bank account here in the US.

BMK

[AccTaxMan]

Answer hinges on whether his parents are a "foreign person."

So he received a wire transfer, or something like that, which originated from a bank account in a foreign country.

Who owns the bank account in the foreign country?

One or both of his parents, based on the information you provided.

Is the parent (or parents) who owns that bank account a US citizen or resident alien?

If so, then he doesn't have to file Form 3520.

The question is not where the money came from, but rather who it came from.

If his father is a nonresident alien, and his father gives him a gift of $150,000, then he would have to file Form 3520 even if the money originated from a bank account here in the US.

BMK

Yes his parents are foreign nationals in a foreign country and remit the money to him from a foreign account.

But it is a loan, not a gift. Does it make a difference?

[Koss]

Not a gift, bequest or trust...

My reading of the instructions for Form 3520 leads me to the conclusion that the form does not have to be filed.

Who Must File

File Form 3520 if any one or more of the following applies:

1. You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or a person related to the trust) that you treated as a qualified obligation during the current tax year. Responsible party, reportable event, and qualified obligation are defined on page 4.

Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for Part I.

2. You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.

Complete the identifying information on page 1 of the form and Part II. See the instructions for Part II

Note. You are required to complete Part II even if there have been no transactions involving the trust during the tax year.

3. You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust (including the uncompensated use of trust property after March 18, 2010) during the current tax year or a related foreign trust held an outstanding obligation issued by you (or a person related to you) that you treated as a qualified obligation (defined on page 4) during the current tax year.

Complete the identifying information on page 1 of the form and Part III. See the instructions for Part III.

4. You are a U.S. person who, during the current tax year, received either:

1. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

2. More than $14,165 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

Complete the identifying information on page 1 of the form and Part IV. See the instructions for Part IV.

I don't see how it could be possibly be construed as a trust, and if it's a loan, then it's not a gift or a bequest.

I hope that he executed a promissory note, and that he's making loan payments... Otherwise, it's not really a loan.

If, at some point in the future, the parents forgive part or all of the loan, then that would appear to trigger a filing requirement, because that could be considered a gift.

BMK

[AccTaxMan]

My reading of the instructions for Form 3520 leads me to the conclusion that the form does not have to be filed.



I don't see how it could be possibly be construed as a trust, and if it's a loan, then it's not a gift or a bequest.

I hope that he executed a promissory note, and that he's making loan payments... Otherwise, it's not really a loan.

If, at some point in the future, the parents forgive part or all of the loan, then that would appear to trigger a filing requirement, because that could be considered a gift.

BMK

Thank you BMK

Here is the deal. There is a promissory note. But It is an interest free loan. And the repayment date does not start until 2025. Moreover, this 'promissory note' was signed by the lenders only. Taxpayer, who is the borrower did not even sign it. Would you still consider it as a loan?

Updated: Lender is taxpayer's father. Taxpayer said that's why it is an interest free loan. Also, the promissory note was made in the foreign country where his father is. Taxpayer said they were not familiar the format of it and were not even aware that the borrower had to sign too.

If you do not consider it to be a loan, then would you make the arbitrary decision that it is a gift and go ahead to file the Form 3520 for him?

[AccTaxMan]

Hi BMK, are you around? More of your opinion on this issue will be very appreciated. Thanks.

[Koss]

Promissory Note

The promissory note, even if it is defective, or does not meet accepted standards in this country, is still good evidence that it is a loan and not a gift. The fact that it is interest-free also does not mean that it's not a loan.

The borrower might have imputed income, but that's another story for another day.

The linchpin, for me, is whether the borrower is making regular payments on the loan in a manner that can be clearly tracked and documented. If he is, then I would treat it as a loan.

Unless the promissory note contains terms that allow him to defer payments for an extended period of time. That would throw a further monkey wrench into the mix...

BMK

[AccTaxMan]

The promissory note, even if it is defective, or does not meet accepted standards in this country, is still good evidence that it is a loan and not a gift. The fact that it is interest-free also does not mean that it's not a loan.

The borrower might have imputed income, but that's another story for another day.

The linchpin, for me, is whether the borrower is making regular payments on the loan in a manner that can be clearly tracked and documented. If he is, then I would treat it as a loan.

Unless the promissory note contains terms that allow him to defer payments for an extended period of time. That would throw a further monkey wrench into the mix...

BMK

Thank you for your reply BMK.

The repayment does not start until year 2025, do you consider it a term that allow him to defer payments for an extended period of time?

[Koss]

Repayment

Well, yeah, so that explains why he hasn't actually made any payments since he received the loan.

I think it is a genuine loan, because there is a written instrument, and there is intent by both parties for it to be treated as a loan. So Form 3520 probably isn't required.

There may not be a black-and-white answer for this particular set of facts and circumstances.

What it may come down to is this: What are the competing interests? It's not a very complicated form. If you want to CYA, or if your client wants to CHA, then just file the form. Maybe the client needs to make the final decision, after you educate on him on the fact that the loan he got from his dad might be construed to be a gift, although my personal opinion is that that is unlikely to happen.

What is the downside to filing the form? Are you concerned that just filing the form may bring undesired scrutiny?

What is the downside to not filing the form? I don't think anyone could quantify the probability that the IRS will determine, at some future date, that the form should have been filed, and then attempt to assess a penalty. But you could educate your client on the amount of any such penalty, and explain that you can't measure the probability of such a penalty actually being assessed.

Worst case scenario, you fight the penalty. There's a loophole for "reasonable cause." He thought it was loan, for heaven's sake.

But again, what are the reasons for not filing the form, just to be safe?

It's almost like you're a doctor, and you have to get your patient to choose between two different treatment options, weighing the risks and benefits of each...

You've veered into an area that is an art form, not a science. This isn't like saying, "coffee is not a deductible medical expense, but caffeine pills, if prescribed by a doctor, are a deductible medical expense." This issue involves a judgment call. It may be one that only the client can make, once you educate him.

BMK

I really oughta add a Circular 230 disclosure to this post LOL

[AccTaxMan]

Well, yeah, so that explains why he hasn't actually made any payments since he received the loan.

I think it is a genuine loan, because there is a written instrument, and there is intent by both parties for it to be treated as a loan. So Form 3520 probably isn't required.

There may not be a black-and-white answer for this particular set of facts and circumstances.

What it may come down to is this: What are the competing interests? It's not a very complicated form. If you want to CYA, or if your client wants to CHA, then just file the form. Maybe the client needs to make the final decision, after you educate on him on the fact that the loan he got from his dad might be construed to be a gift, although my personal opinion is that that is unlikely to happen.

What is the downside to filing the form? Are you concerned that just filing the formmay bring undesired scrutiny ?

What is the downside to not filing the form? I don't think anyone could quantify the probability that the IRS will determine, at some future date, that the form should have been filed, and then attempt to assess a penalty. But you could educate your client on the amount of any such penalty, and explain that you can't measure the probability of such a penalty actually being assessed.

Worst case scenario, you fight the penalty. There's a loophole for "reasonable cause." He thought it was loan, for heaven's sake.

But again, what are the reasons for not filing the form, just to be safe?

It's almost like you're a doctor, and you have to get your patient to choose between two different treatment options, weighing the risks and benefits of each...

You've veered into an area that is an art form, not a science. This isn't like saying, "coffee is not a deductible medical expense, but caffeine pills, if prescribed by a doctor, are a deductible medical expense." This issue involves a judgment call. It may be one that only the client can make, once you educate him.

BMK

I really oughta add a Circular 230 disclosure to this post LOL

Once again, thank you very very much for your input, BMK.

I don't think the taxpayer is worried about undesired scrutiny at all. Based on my impression, there is nothing that he wants to hide. Actually he did ask me if it's ok for him to just go ahead to file the Form 3520 whether it is a legitimate loan or not.

My concern is if it is a loan but if we go ahead to file the Form 3520 as a gift, would it be a mistake?

If there is no drawback at all to file the Form 3520 even if it is not a gift but really a loan, we would go ahead to do it without a second thought.

However, my concern is that we might incorrectly file the Form 3520 by reporting it as a gift when it is really a loan. Am I worried too much?

[Koss]

Form 3520

I don't think there is any real, substantive drawback or risk to filing the form as a precaution, if your client chooses to err on the side of caution.

My personal take is that this is a loan, and the form is simply not required. If I were making the decision for myself as the taxpayer (not for a client), I would not file the form.

But if I had a client in this situation, I would let the client make the decision.

If the person who gave him the gift-that's-really-a-loan was a US citizen or resident alien subject to US taxation, then I would be concerned about mischaracterizing it as a gift, because then that person would have to file a gift tax return.

But if his father was a US citizen or resident alien subject to US taxation, we wouldn't be having this discussion, because Form 3520 is about gifts transferred by foreign persons.

To me, filing Form 3520 is theoretically a red flag, not for an audit, but for other, much more esoteric, wierd s**t that no one ever talks about. We're talking borderline conspiracy theory stuff. I wouldn't want that thing in my filing history if it's not required. I would be concerned that it could cause other issues, like problems with future wire transfers getting put on hold by the Office of Foreign Assets Control, or even result in some sort of delay or extended interview by federal agents if I was entering or leaving the United States.

On my own personal tax return, I would prefer to assume the risk of having to defend the decision not to file the form. Although this risk can't be quantified, I think it is a very concrete, very defined, very limited risk. And even if I ultimately had to concede that the form should have been filed, I would still feel very comfortable arguing the reasonable cause case for not imposing a penalty. I'm more comfortable with that risk than the vague, nebulous, undefined risk that comes with filing a really kinky form that probably isn't necessary.

I don't think one course of action is more or less risky than the other in this scenario. But my personal take is that I prefer the risk that I know and understand.

Your client may have a very different outlook.

BMK

[Questionguy101]

To me, filing Form 3520 is theoretically a red flag, not for an audit, but for other, much more esoteric, wierd s**t that no one ever talks about. We're talking borderline conspiracy theory stuff. I wouldn't want that thing in my filing history if it's not required. I would be concerned that it could cause other issues, like problems with future wire transfers getting put on hold by the Office of Foreign Assets Control, or even result in some sort of delay or extended interview by federal agents if I was entering or leaving the United States.

BMK

Are you saying that by filing a Form 3520 for your client, you might be interviewed by the federal agents when you are entering or leaving the US in the future?

[Koss]

Form 3520

No, that's not what I meant.

As a tax pro, I'll prepare and file any form that is appropriate, and I'm not worried about anything strange. In this scenario, I don't think the form is necessary, but it's a gray area, and if the client wanted to file it, I would prepare and file it.

What I meant was that a taxpayer who files Form 3520 might possibly conceivably end up with his or her name on some sort of list created by some sort of filter, and that the list might be shared by the IRS with other federal agencies, and that under the right confluence of circumstances, it could result in complications for that taxpayer in some other context.

So for ME, if I were the taxpayer, in this gray scenario, I would not file the form.

BMK

[Questionguy101]

No, that's not what I meant.

As a tax pro, I'll prepare and file any form that is appropriate, and I'm not worried about anything strange. In this scenario, I don't think the form is necessary, but it's a gray area, and if the client wanted to file it, I would prepare and file it.

What I meant was that a taxpayer who files Form 3520 might possibly conceivably end up with his or her name on some sort of list created by some sort of filter, and that the list might be shared by the IRS with other federal agencies, and that under the right confluence of circumstances, it could result in complications for that taxpayer in some other context.

So for ME, if I were the taxpayer, in this gray scenario, I would not file the form.

BMK

I see. You do have a point there.