Do All Foreign Gifts Have To Be Reported?
When a US Person learns they have missed their FBAR or Form 8938 filing requirements — or they have unreported overseas income that they failed to report — the floodgates soon open and the taxpayer realizes that there are other international reporting requirements they have missed in one or more prior years and should have been lodged with the IRS. Commonly, taxpayers would have not reported foreign accounts on other international information reporting forms as well, such as FATCA Reporting on IRS Form 8938. One important requirement that many US taxpayers only learn about many years after the fact is that when they receive foreign gifts, the gift must be reported when the Form 3520 threshold requirement for reporting is met. Of important note is that while the money received is not actually income per se, that does not mean that the actual gift is not reportable; it is still reportable to the IRS. And, over the past few years, foreign gift reporting enforcement has become a key priority for the Internal Revenue Service — with taxpayers getting penalized upwards of 25% value of the unreported gift. Let’s go through three typical examples of when a taxpayer must file Form 3520 to report their foreign gift.
Foreign Gift From an Individual
In any year that the taxpayer receives a gift from a foreign person that exceeds more than $100,000, they are required to report this information on Form 3520 — and the threshold for reporting has many nuances to it. Namely, it involves receiving a gift or gifts from the same person — or related persons — in the same tax year. For example, if your sweet grandma in Taiwan gifted you $125,000, that gift would be reportable. Likewise, if a different person gifted you five gifts of $25,000 in the same year –– those gifts too would be reportable, as they aggregate to over $100,000 in the same year.
Foreign Gift From an Entity
The threshold for receiving a gift from a foreign entity is much lower at $16,815. In other words, if one of your parents has a foreign entity and they decide they want to distribute a $25,000 gift to you from the entity and not personally, then the gift can be reportable because the gift was from an entity and exceeded the threshold.
Foreign Trust Distributions Are Reportable Too
The US government is not a fan of foreign trusts. Therefore, US Person beneficiaries who receive a distribution (of any value) from a foreign trust, must report this distribution on Form 3520 as well. Unlike foreign gifts, there is no threshold requirement and all foreign trust distributions must be reported.
Penalties for Non-Reporting
When a person fails to properly file a Form 3520 timely to report the foreign gift, they can get hit with significant fines and penalties — 5% of the gift value accrues per month, up to 25% value of the gift. And, since most taxpayers do not realize they missed the reporting requirement for several years after the fact, the 25% penalty is quite common – despite there being no unreported income.
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