Is there a Foreign Gift Tax in the US?
Form 3520 & Foreign Gift Tax: When it comes to gifts from foreign persons, it is important to distinguish between the tax and reporting rules. The Form 3520 is used to report the value of a gift received from a foreign person. More specifically, when a U.S. person receives a gift from a foreign person (or multiple transactions from the same person, in the same tax year aka “aggregate value”), The U.S. person reports the value of the annual gift when it exceeds the threshold requirement for reporting. As to the taxation of foreign gifts, the general rule is that gifts from foreign persons are not taxed. But, a key exception is when a foreign person (Non-Resident Alien or “NRA”) gifts U.S. real estate. Let’s review the basics of Foreign Gift Tax in the US.
Form 3520 is not a Tax Form
There are no specific IRS taxes on gifts received from a foreign person. In other words, if a U.S. person receives a gift from a foreign person, that specific transaction is not taxable. Instead, the U.S. person must report the gift (when the threshold is met) on IRS form 3520.
Why isn’t the Gift Taxable?
The reason why the gift is not taxable to the U.S. person is that the gift is not income. The reason the gift is not taxable to the foreign person giving the gift is that a non-resident alien (NRA) is not required to comply with IRS gift tax rules (absent gifts of USRPI). Nevertheless, the IRS wants to know about the foreign gifts received by the U.S. Person when the threshold for reporting is met. Here are some examples of gift reporting and a summary of the thresholds for reporting.
*If the gift generates income (such as rental income, interest, dividends, and/or capital gains) then the income generated from the gift is taxable, and that income would be included on the U.S. person’s tax return.
Unreported Foreign Gift?
When a person meets the threshold for filing a gift but fails to do so, they may be subject to fines and penalties. If a person receives a CP15 Notice, they are under strict time requirements to reply — and time is of the essence to lodge a timely response. This is a penalty for reporting non-compliance — but it is not a foreign gift tax as it is not based on any income associated with the gift. Here is a detailed summary of Form 3520 Penalties and how to abate or remove them.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Form 3520 penalty abatement.
Contact our firm today for assistance.