Reporting Foreign Gifts
One of the most perplexing aspects of the Internal Revenue Code involves the international reporting requirements for US persons who have income, assets, or accounts overseas. And, out of all the complexities of international reporting, the reporting of foreign gifts has to be one of the most unfair. When a US person receives a gift from a foreign person — and the value of the gift or gifts from the same person or related persons exceeds the threshold value for filing — the taxpayer must file a Form 3520. If the taxpayer neglects to file the Form 3520, they can become subject to fines and penalties which can reach 25% value of the gift. In an all too common situation, a US person may receive a gift from their parents in order to purchase a home in the United States. If the taxpayer fails to file the form timely, the taxpayer may become subject to a 25% penalty on the value of that gift — even though there is no unreported income or tax impact for this particular type of gift. Let’s take a look at five examples of when you have to report foreign gifts to the IRS.
Gift From Mom to Purchase a Home
The taxpayer is a green card holder who is an LPR in the United States and recently graduated from medical school. She does not yet have any credit and is, therefore, unable to obtain a mortgage. Her parents gift her $1 million so she can acquire a small property in San Jose. Since taxpayer received a gift from her exceeded $100,000 during the tax year. This gift is reportable on Form 3520.
Gift From Parents for Living Expenses
The taxpayer receives a gift of $150,000 to help subsidize his living expenses while attending school in Los Angeles and living off-campus. While Taxpayer’s parents pay tuition directly to the university, his living expenses and other incidentals are ancillary to the exception of gifts for medical and tuition — and therefore reportable on Form 3520.
Corporate Gift from Mom’s Company
The taxpayer resides in the United States and her parents own a company in China. That company gifts Taxpayer $50,000 – which is neither salary nor dividends — it is simply a gift from the company. The reason the foreign parents gave the gift through the company was that due to currency restrictions — it was just easier to issue the gift through the entity. Since the threshold requirements for receiving a gift from a foreign entity hovers around $17,000, this is the type of gift that breaks the threshold for reporting — and requires reporting of the foreign gift on Form 3520. Noting, reporting requirements on the Form 3520 for reporting a gift from a foreign entity or more detailed than a gift before an individual.
Related Party Gifts
In order to make the reporting requirements even more complicated, it is important to keep in mind that the gift does not have to be from one person to be reportable. Rather, if a US Person receives multiple gifts from related parties in the same year, and the aggregate total value of the gifts exceeds $100,000, then the US person still has to report to gifts.
As provided by Form 3520 instructions:
To calculate the threshold amount ($100,000), you must aggregate gifts from different foreign nonresident aliens and foreign estates if you know (or have reason to know) that those persons are related to each other (see Related Person, earlier) or one is acting as a nominee or intermediary for the other.
For example, if you receive a gift of $75,000 from nonresident alien individual A and a gift of $40,000 from nonresident alien individual B, and you know that A and B are related, you must answer “Yes” and complete columns (a) through (c) for each gift.
A related person generally includes any person who is related to you for purposes of sections 267 and 707(b). This includes, but is not limited to:
A member of your family—your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), lineal descendants (children, grandchildren, etc.), and the spouses of any of these persons; or
A corporation in which you, directly or indirectly, own more than 50% in value of the outstanding stock. See section 643(i)(2)(B) and the regulations under sections 267 and 707(b)
Foreign Trust Distributions
When are US person receives trust distributions from a Foreign Trust, the trust distributions are still reportable no matter how low the value of the distributions is. In other words, there is no threshold minimum value requirement when it comes to foreign trust distributions — so essentially all foreign trust distributions to a US person are reportable on Form 3520.
Our International Tax Lawyers Represent Clients Worldwide
Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.