Gifts from Foreign Persons & Reporting to the IRS

Gifts From Foreign Persons

Gifts from Foreign Persons 

When people think of the Internal Revenue Service, most of the time the focus is on tax-related issues. And, when it comes to international matters, most taxpayers are concerned about issues involving international reporting of foreign accounts, assets, investments, and income. For example, does the taxpayer have to report interest that was generated overseas and is exempt in the foreign country? Or, what types of foreign brokerage accounts are reportable to the US government? Most U.S. persons who have foreign, non-resident alien family members would not in their wildest dreams imagine that simply receiving a gift or an inheritance from a non-resident alien is reportable in the United States. Adding insult to injury, the IRS has gotten into the habit of issuing maximum penalties for the failure to report these foreign gifts and inheritances, which oftentimes may reach 25% value of the gift. In a typical situation, a foreign parent may gift their US Person child money to assist with purchasing a home or other asset, which the taxpayer in the United States simply does not have sufficient credit to acquire. The fact that the IRS issues 25% penalties on the value of these gifts and inheritances is mind-boggling — but as a result, it is important that taxpayers are aware of the gift reporting requirements. Let’s take a look at some of the more common situations.

IRS Reporting of Gifts From Foreign Persons

The Reporting Gifts From Foreign Person rules can be complex. In a very typical situation that we handle, foreign parents who live abroad (non-U.S. persons) will gift money to their child in the U.S. The child may have U.S. Person Status and/or be on an F-1 visa (but past the 5-year grace period). As a result, the person is technically a U.S. person receiving a gift from a foreign person.

*The rules apply specifically to gifts from foreign persons and not necessarily foreign property.

The IRS wants to Track the Money

There are several reasons why the IRS tracks the receipt of gifts from foreign persons. But, the main reason is that foreign nationals without U.S. status are not subject to U.S. tax or reporting. In contrast, when a U.S. person gifts money or property, they are subject to U.S. estate tax rules. As a result, the person giving the gift files a gift tax return. Conversely, the U.S. has no taxing authority over foreign persons. Therefore, the IRS requires the recipient U.S. person to file Form 3520 to report the gift.

Who Reports Gifts from Foreign Persons to the IRS?

The U.S. person has to report the foreign gift. Whether or not the U.S. person resides in the U.S. or overseas, does not impact the reporting requirement.

Reporting Threshold Requirements

The reporting threshold requirements differ between Foreign Entities and Foreign Individuals.

Individuals

The threshold is “more than $100,000 in a single gift or series of gifts from a foreign individual in a single tax year” when the donor is a foreign individual.

Entity

The threshold is “more than $17,339 in a single gift or series of gifts from a foreign individual in a single tax year” when the donor is a foreign business.

Foreign Individual vs. Foreign Entity

If the foreign person wants to gift money but keeps their information away from the IRS’s prying eyes, it is important to note when a foreign entity gives the gift – the name of the person giving the gift is required – but if the gift is from a foreign individual, the name is not required.

What if I do Not Report the Foreign Gift?

The IRS may issue (extensive) fines and penalties – which may be “automatically assessed.”

What are the Penalties?

The IRS penalties for Form 3520 may vary:

Section 6677

A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is was reasonable cause sufficient to avoid or minimize penalties). Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).

• • • 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.

    • 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.

    • 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II. .

      • Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if such person

        • (a) fails to ensure that the foreign trust files a timely Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries, or

        • (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520. See section 6677(a) through (c) and the Instructions for Part II of this form and Form 3520-A. Additional penalties will be imposed if the noncompliance continues for more than 90 days after IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.

Form 3520 Examples

Here are some common Form 3520 examples of individuals with a Form 3520 Reporting Requirement:

Foreign Person Gift of More than $100,000 (Common Form 3520 Example)

A gift from a foreign person is by far the most common Form 3520 situation.

David is from Taiwan and now resides in the U.S. as Legal Permanent Resident. His parents are Taiwanese and non-U.S. Persons. They want to help David purchase a home in the U.S., so they gift him $900,000. The gift is from a foreign person and exceeds $100,000, so it is reportable on Form 3520.

• • • It does not matter if the gift was a single transactions, or 10 transactions of $90,000 (in the same year).

    • It does not matter if David does not have a tax return filing requirement (because his income is below the threshold)

Foreign Corporation or Partnership

Michelle is from Spain but resides in the U.S. on an H-1B Visa and meets the Substantial Presence Test. Her parents own several corporations in Spain, and they want to give her a gift. Under foreign law, it would benefit the parents (non-U.S. Persons) to give the gift from the foreign corporation instead of by themselves as individuals.

The corporation gifts Michelle $24,000.

The gift is reportable on Form 3520.

U.S. Person Transferred Money into Foreign Trust

When a person is a U.S. person and transfers money into a foreign trust, they may also be required to file Form 3520.

For example, Scott is a Green Card Holder who transferred $85,000 into a foreign trust. This transaction is reportable on Form 3520.

As provided by the IRS:

• • • “You are a U.S. transferor who, directly or indirectly, transferred money or other property during the current tax year to a foreign trust.”

U.S. Owner of a Foreign Trust

When a U.S. Person owns a foreign trust, they may be required to report the trust on Form 3520 depending on various factors. In addition, the person may have to file other forms, such as Form 3520-A.

As provided by the IRS:

• • • “You are a U.S. owner of all or any portion of a foreign trust at any time during the tax year.”

Distributions from a Foreign Trust

Receiving a Foreign Trust Distribution automatically puts a U.S. Person on the radar. If a U.S. person receives a distribution from a foreign trust, that distribution is reported to the IRS on Form 3520.

As provided by the IRS:

• • • “You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who, during the current tax year, received, directly or indirectly, a distribution from a foreign trust…”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.