The Different Thresholds for Reporting a Foreign Gift Compared
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Different Thresholds for Foreign Gift Reporting Purposes
When a US person, such as a US citizen, lawful permanent resident, or foreign national who meets the substantial presence test receives a gift from a foreign person (non-resident alien), they may be required to file a Form 3520 to report the gift to the IRS. This is despite the fact that the gift itself is not taxable and there is no unreported income. Making matters worse, is that in recent years the internal revenue service has been issuing assessable penalties for failure to file Form 3520. These penalties are based on the value of the gift — with the penalty value being 5% a month up to a total value of 25% of the gift. Since the penalties are assessable penalties they are simply assessed without providing the Taxpayer any notice or forewarning so that they can try to preempt the penalty by showing reasonable cause and not willful neglect. Depending on the type of gift will impact the threshold for having to report a Form 3520. The threshold for reporting gifts from foreign entities adjusts for inflation while the gift threshold for individuals has remained constant for many years.
Foreign Individual Gift to US Person Threshold
If a US person receives a gift from a foreign person, and the value of that gift exceeds more than $100,000 as either a single gift or several gifts from the same person in the same tax year — then the US person must file a Form 3520. Related party rules apply so that for example if one person gifted $70,000 to the US person and another related person gifted $50,000 to the US person, then under the related party rules the total value of the gift would exceed $100,000 and a Form 3520 would be required.
Threshold for an Overseas Entity Gift to US Person
When you receive a gift foreign entity, the threshold is much lower and the reporting requirements are enhanced. In other words, the person reporting has to provide additional identifying information about the foreign entity which is not required when they receive a gift from a foreign individual. The current threshold is $16,851 and the adjustments can be found on the inflation adjustments page.
Distribution from Foreign Trust has no Threshold
Unfortunately, there is no minimum threshold requirement for US persons who receive distributions from foreign trusts. In other words, if a US person receives a distribution from a foreign trusty, they have to report the distribution on form 3520.
Failed to Report Form 3520
The logistics of strategizing a late-filed Form 3520 and follow-up — if a penalty has been issued — is very complex. In November 2020, the IRS terminated a much gentler version of the Delinquent International Information Return Submission Procedures. Other issues to be taken into consideration are whether there were other missed filings as well such as foreign accounts, assets, investments, and income which would necessitate the filing of an FBAR or Form 8938 – which may open up other avenues for disclosure. You should speak with one or more Board-Certified Tax Law Specialists who specialize exclusively in this area of international tax to help you get a lay of the land.
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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure and 3520 Assessable Penalties.
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