When Are Foreign Gifts Taxable or Reportable (Examples)

Gifts from Foreign Persons & Reporting to the IRS

Are Foreign Gifts Taxable or Reportable to the IRS?

When it comes to reporting foreign transactions to the IRS, most U.S. taxpayers (living in the U.S. or abroad) are familiar with having to disclose foreign accounts, assets, income, and investments. For example, a taxpayer may own a foreign TFSA investment account in Canada or an Indian Demat account and must report the information on international reporting forms such as the FBAR and Form 8938. In addition to reporting foreign accounts and assets, taxpayers who receive cash and other non-cash gifts from Non-Resident Aliens (NRAs) must also report this information when the threshold requirements for reporting have been met. IRS Form 3520 is the form used to report the receipt of foreign cash gifts and other gifts (including foreign trust distributions). Importantly, the threshold requirements for filing Form 3520 vary depending on whether the gift is from an individual, or entity, or distributed from a foreign trust. Let’s look at some common foreign gift reporting examples:

*Golding & Golding originally published this article back in 2020 and has since been updated.

**For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

The Purpose of Form 3520

While Form 3520 may be used for several different purposes, one of the most common situations is when a U.S. person receives a gift, inheritance, or foreign trust distribution from an NRA. Other common situations include reporting the ownership of a foreign trust or receipt of foreign trust distributions. While the IRS has aggressively penalized taxpayers who filed late Form 3520 or 3520-A, some taxpayers who have been penalized by the IRS may qualify for a penalty abatement if they can show reasonable cause and/or submit to one of the offshore disclosure programs. Let’s walk through some common examples of who must file Form 3520 and 3520-A.

First, Tax vs Reporting

It is important to consider that there are two components to foreign gift disclosure. The first component involves reporting the gift to the IRS on Form 3520. The second component involves the taxation of the foreign gift, but most of the time when a taxpayer receives a gift from a non-resident alien — such as the gift of cash — it is not taxable, but it is still reportable to the IRS.

Form 3520 Foreign Gift

One of the most common scenarios involves when a U.S. person receives a gift from a non-resident alien (NRA) that exceeds the threshold for filing:

• • • Example: Dana is a U.S. Citizen but the rest of her family are non-resident aliens who live abroad. Her aunt is very proud that Dana graduated college and gifted her $400,000 to help her purchase a new home. Dana may have to file Form 3520.

    • Example: Devin is a Lawful Permanent Resident who currently attends school in the United States. Devin’s grandma is a non-resident alien who wants to help Devin with expenses — and gifted him $200,000 to help him supplement his expenses. Even if Devin does not use all the money for expenses, his grandma made it clear that the full amount is a gift to Devin. Devin may have to file Form 3520.

    • Example: Denise’s mom is a non-resident alien who wants to gift Denise and her sister each 15% in a foreign business. The value of the shares that Denise receives are $500,000. Even though Denise did not receive money, and the business is located outside of the United States, she may have to file Form 3520.

    • Example: Daniel is a visa holder who meets the substantial presence test. His dad gifted him a foreign rental property worth $600,000 so that Daniel can both own the property and collect any rents that are paid. Even though the rental property is located outside of the United States, Daniel still received a gift from a non-resident alien and may have to file Form 3520.

Form 3520 Foreign Inheritance

For purposes of Form 3520, the IRS takes the position that an inheritance is a type of gift — and therefore if the Taxpayer receives an inheritance from a non-resident alien, it is reportable on Form 3520.

• • • Example: Brenda is a Lawful Permanent Resident who lives in the United States and recently received a $600,000 inheritance from her foreign mother who passed away. The inheritance is comprised of foreign property and assets and have not been transferred to the U.S. Even though no money or assets have been transferred to the United States, Brenda may still have to file Form 3520.

    • Example: Bill is a U.S. Citizen who received a $3,000,000 inheritance when his foreign father passed away. While it is a large sum of money and Bill is not required to pay any taxes on the inheritance, he may have to file Form 3520.

    • Example:  Belinda is a Lawful Permanent Resident who has several family members living overseas. Her mother also a Lawful Permanent Resident who lives in a foreign country. Belinda’s mom recently passed away and left Belinda $1,000,000. Even though Belinda’s mom lives outside of the United States, because she is a ‘U.S. person for tax purposes,’ Belinda is not required to file a Form 3520 when receiving this inheritance.

Form 3520 Trust Distribution

When a person receives a trust distribution from a foreign trust, the U.S. beneficiary is required to report the distribution on Form 3520 — but the tax implications of the distributions will vary depending on the type of foreign trust.

• • • Example: Steven is a U.S. Person who is a beneficiary of a foreign non-grantor trust. He received a $70,000 distribution in the current year from the foreign trust and is therefore required to file a Form 3520 — as well as include the trust distribution as income.

    • Example: Sam is a U.S. Person who is a beneficiary of a foreign grantor trust. Sam also received a $70,000 distribution in the current year from the foreign trust. Even though Sam is required to report the trust distribution on Form 3520, generally it is the grantor of a grantor trust who is required to pay tax on the income and not the beneficiary. (If the grantor of the foreign trust is a U.S. person and/or the trust contains both U.S. and foreign assets, it can further complicate the reporting).

Form 3520/3520-A Ownership of Foreign Trust

When a Taxpayer has ownership of a foreign trust, they may be required to file form 3520 and form 3520-A. The reporting requirements for ownership of a foreign trust are typically more complicated than when a taxpayer files a Form 3520 to report the receipt of a gift or distribution.

• • • Example: Denise is a U.S. Citizen who has non-resident alien family members living abroad. Her sisters — who are all non-resident aliens– decided to form a foreign trust and wanted to include Denise as one of the owners. Now that Denise is an owner of the foreign trust, she is required to report her ownership on form 3520 and 3520-A.

    • Example: Daniel is a Lawful Permanent Resident who recently became a U.S. person in the current year. Now that Daniel is a Lawful Permanent Resident and a U.S. person for tax purposes, his ownership in his foreign trust is now reportable on Form 3520 and 3520-A (U.S. owner of a foreign trust). In other words, even though the only action Daniel took was to become a U.S. person, his previous ownership in a foreign trust that he owned before becoming US person is now reportable.

Related Persons Rules

An important rule to remember is that when Taxpayers receive a gift from foreign persons and those persons are related, then all of the gifts from related persons are aggregated together to determine whether the threshold requirements are met. This is to prevent taxpayers from ‘gift splitting’ to avoid reporting when the gifts are coming from the same related person. It is also important to note that related parties can include individuals or entities.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of Form 3520/3520-A. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.