When Do Foreign Gifts Have to Be Reported?
Oftentimes, when US Persons come to the realization that they were required to disclose their foreign bank and financial accounts on the annual FBAR Form, 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 filed 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 on the Form 3520 if the 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 enforcement priority for the Internal Revenue Service, with Taxpayers getting penalized 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.
Gift From a Foreign 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.
Gift From a Foreign Entity
The threshold for receiving a gift from a foreign entity is much lower and hovers around $16,500-$17,000. 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.
Distribution From a Foreign Trust
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.
Foreign Gift Penalties
When a person fails to properly file a Form 3520 timely to report the foreign gift (or distribution), 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. Taxpayers may qualify for one of the offshore amnesty programs to safely get into compliance.
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