A Home Purchase with Foreign Money Can Trigger Form 3520

A Home Purchase May Trigger Form 3520, Be Extra Careful

A Home Purchase May Trigger Form 3520

Another tax season is upon us, and U.S. persons who have foreign accounts, assets, and investments begin to learn more about what their reporting and filing requirements are, they may come to the realization that they have to file a Form 3520 — or that they possibly should have filed a Form 3520 in prior years. Taxpayers must be very cautious when it comes to Form 3520 because unfortunately there is a lot of bad information and misinformation out there on the World Wide Web by attorneys who are nowhere near as experienced as they would like you to believe they are. It is important that taxpayers who may have a Form 3520 filing requirement understand what could trigger a filing of the form. Let’s take a look at a few common examples of what may trigger a Form 3520 situation with the IRS.

Foreign Gift For the Purchase of a U.S. Home

In an all-too-common situation, a U.S. person may receive a large gift from a foreign person — usually a family member – — to assist with the purchase of a new home. Oftentimes, these transfers are gifts and not loans. As a result of receiving the gift, the Taxpayer has to report this gift even though the money may immediately be used to purchase a home in the United States — or other large asset.

Direct Payment to the Seller

In another common situation, taxpayers do not realize that if the parents purchase a home in the U.S. and transfer the money for the purchase of that home to the seller (even though the money goes directly to the seller instead of going directly to the taxpayer ) that this is considered a gift to the Taxpayer. In this type of situation, even though technically the taxpayer did not receive the money, the IRS would see this situation as either the money or the home is the gift and either one would have to be reported since it was given by a foreign person.

Paying off the Mortgage

Sometimes, the gift is not for the purchase of the home but for paying off the mortgage. For example, let’s say a U.S. taxpayer has a $500,000 mortgage left on their home. The taxpayer just graduated from graduate school and her wealthy foreign parents want to pay off the mortgage. As a result, the foreign parents make payments directly to the mortgage company for the amount outstanding on the loan. From an IRS perspective, this would be considered a gift of the amount of money used to pay off the mortgage.

Loan or Gift

Taxpayers must also be cognizant of whether they are receiving the money as a gift or a loan. If the money is a gift then it is reported on Form 3520 but if it is not a gift and rather a loan, it would not be reported on Form 3520 — although the taxpayer may have other requirements as well. Likewise, if the transfer begins as a loan, but then the loan is considered forgiven, it may spark a Form 3520 requirement at the time the loan was given. This presumes that the loan was legitimate before the foreign parents agreed to pay off the loan as a gift to the US person.

International Wire Transfer May Alert the IRS

One common way that a taxpayer may find themselves on the receiving end of a Form 3520 inquiry from the IRS is when they receive a large transfer from a foreign country. That is because sometimes these types of transfers can lead to international wire transfer audits. If the taxpayer ends up being audited by the IRS on this issue and the IRS realizes that the transfer was a gift or foreign inheritance, it may trigger a Form 3520 penalty.

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.