The Anti-Avoidance Rules for Foreign Gifts, Recharacterization

What are Foreign Gift Anti-Avoidance Rules (and Recharacterization)

Understanding Foreign Gift Anti-Avoidance Rules

One of the biggest concerns that the IRS has when it comes to the reporting of foreign gifts and trusts, is making sure that taxpayers report the information accurately. An issue that has arisen over the years is that taxpayers who may have received a large foreign gift, do not want to report the transfer as a gift — because they want to avoid having to file Form 3520 and/or they did not file the form in the year that the gift was received and then want to try to avoid the harsh penalties under Internal Revenue Code, Section 6039F. In response to this issue, the IRS proposes anti-avoidance rules to ensure that foreign gifts are accurately reported as foreign gifts and not as loans or other transfers that would not negate the filing of Form 3520 reporting. If the IRS believes that the transfer has all the ‘indicia’ of being a foreign gift, then the IRS will categorize these amounts as foreign gifts, and presumably, if Form 3520 was not filed timely or accurately will then turn around and issue fines and penalties for non-compliance.

As provided by the IRS:

Definition of “Foreign Gift” and coordination with section 6048(c)

• • • “For purposes of proposed §1.6039F-1, the term foreign gift is defined to include any amount received from a person other than a U.S. person that the recipient treats as a gift, bequest, devise, or inheritance for Federal income tax purposes.

  • • The term, however, does not include any qualified transfer within the meaning of section 2503(e)(2) (relating to certain transfers for educational or medical expenses) or any transfer from a foreign trust that is treated as a distribution (within the meaning of proposed §1.6048-4(b)) and reported on a return under proposed §1.6048-4. Proposed §1.6039F-1(b)(1) also provides that a U.S. person who receives a transfer from a foreign trust must treat the transfer as a distribution from the trust that is reportable under proposed §1.6048-4, rather than reportable as a foreign gift under proposed §1.6039F-1(a), even if the U.S. person treats the transfer as a gift for another purpose, such as computing the U.S. person’s Federal income tax liability.”

Proposed §1.6039F-1(b)(2)

• • • Proposed §1.6039F-1(b)(2) includes an anti-avoidance rule that provides that the term foreign gift includes transfers from a person other than a U.S. person that the recipient does not treat as a gift, bequest, devise, or inheritance for Federal income tax purposes, such as a purported loan, if based on all the facts and circumstances the IRS determines that the transfer is in substance a gift.

  • • The IRS has become aware of U.S. persons who are seeking to circumvent the section 6039F information reporting rules by claiming that the amounts they receive from foreign persons are not foreign gifts because they do not treat them as gifts but that they are otherwise not taxable (claiming instead that the transfers are loans).

  • • These amounts, however, objectively have all the indicia of being a gift. Under the existing principles of Federal tax law, the IRS therefore will recharacterize these amounts as foreign gifts that should have been reported under section 6039F.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other 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 (such as FBAR and FATCA) 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 who 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.