Reporting Foreign Gifts on Form 3520
The reporting rules for overseas gifts to the IRS are big business for the Internal Revenue Service. When a U.S. person receives a gift from a foreign person (including inheritance), the U.S. person may have a “3520” offshore reporting requirements. In addition, depending on the type and nature of the gift, the person may have additional reporting requirements, such as FBAR and FATCA. The IRS aggressively enforces Foreign trusts and accounts compliance. Non-compliant U.S. persons may consider filing for tax amnesty – collectively referred to as voluntary disclosure.
We will summarize the tax rules involving Reporting Gifts From Foreign Persons to the IRS, and when it is required.
IRS Reporting of Gifts From Foreign Persons
The Reporting Gifts From Foreign Person rules can be complex. In a very typical situation that we handle, foreign parents who live abroad (non-U.S. persons) will gift money to their child in the U.S. The child may have U.S. person status and/or be on an F-1 visa (but past the 5-year grace period). As a result, the person is technically a U.S. person receiving a gift from a foreign person.
*The rules apply specifically to gifts from foreign persons and not necessarily foreign property.
The IRS Wants to Know
There are several reasons why the IRS tracks the receipt of gifts from foreign persons. But, the main reason is that foreign nationals without U.S. status are not subject to U.S. tax or reporting. In contrast, when a U.S. person gifts money or property, they are subject to U.S. estate tax rules. As a result, the person giving the gift files a gift tax return.
Conversely, the U.S. has no taxing authority over foreign persons. Therefore, the IRS requires the recipient U.S. person to file a Form 3520 to report the gift.
Who Reports Gifts from Foreign Persons to the IRS?
The U.S. person has to report the foreign gift. Whether or not the U.S. person resides in the U.S. or overseas, does not impact the reporting requirement.
Reporting Threshold Requirements
The reporting threshold requirements differ between the Foreign Entities and Foreign Individuals.
The threshold is “more than $100,000 in a single gift or series of gifts from a foreign individual in a single tax year” when the donor is a foreign individual.
The threshold is “more than $16,388 in a single gift or series of gifts from a foreign individual in a single tax year” when the donor is a foreign business.
Foreign Individual vs. Foreign Entity
If the foreign person wants to gift money, but keep their information away from the IRS prying eyes, it is important to note when a foreign entity gives the gift – the name of the person giving the gift is required – but if the gift is from a foreign individual, the name is not required.
What if I do Not Report the Foreign Gift?
The IRS may issue (extensive) fines and penalties – which may be “automatically assessed.”
What are the Penalties?
The IRS penalties for Form 3520 may vary:
A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause). Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).
35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II. .
Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if such person
(a) fails to ensure that the foreign trust files a timely Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries, or
(b) does not furnish all of the information required by section 6048(b) or includes incorrect information. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520. See section 6677(a) through (c) and the Instructions for Part II of this form and Form 3520-A. Additional penalties will be imposed if the noncompliance continues for more than 90 days after IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
How do I Avoid these Penalties?
IRS Offshore Voluntary Disclosure & Streamlined Filing Procedures are two common options for compliance.
We Specialize in IRS Offshore Disclosure & Compliance
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure and gifts from foreign persons.
Contact our firm today for assistance.