If you are a U.S. citizen or resident and the value of aggregate foreign gifts that you receive during any tax year exceeds a certain threshold, you must report each foreign gift to the IRS. A “foreign gift” is any amount you receive from a non-U.S. person that is either a gift or a bequest. A non-U.S. person is any person other than a citizen or resident of the United States, and includes a foreign estate. Foreign gifts do not include direct payments for qualified tuition or medical expenses made on behalf of the recipient, or gifts that are otherwise properly disclosed on a return under the separate requirements applicable to amounts received from foreign trusts.
For purposes of determining whether the receipt of a gift from a foreign person is reportable, different thresholds are applied for gifts received from individuals and estates than for gifts from partnerships and corporations. A U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the total amount of gifts from that nonresident alien or foreign estate is more than $100,000 during the tax year. Once the $100,000 threshold has been met, the recipient must separately identify each gift that is more than $5,000, but need not identify each donor (other than the donor of the $100,000 gift).
A U.S. person must report the receipt of gifts from foreign corporations and partnerships if the total amount of gifts from all such entities during the year is more than $14,375 (for 2011). Note that this threshold amount is subject to cost-of-living adjustments. Once the threshold has been met, the recipient must separately identify all gifts from foreign corporations and partnerships, including the name of the donor.
If you fall within these reporting rules, you are required to file Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” The form is due on the date that your income tax return is due, including extensions. The form should not be attached to your income tax return, but must be sent separately to the IRS Service Center in Philadelphia.
The penalty for not reporting a foreign gift that must be reported is 5 percent of the amount of the gift for each month the failure to report continues, up to a maximum of 25 percent. The penalty will not be imposed if the failure to file is shown to be due to reasonable cause and not due to willful neglect.
If you have received a gift or inheritance from a non-U.S. person and think that you might have a reporting requirement, or if you have any questions related to this article, please feel free to contact our Tax Director, Dale Mason, at firstname.lastname@example.org or at 703-502-9500.
This newsletter is for informational purposes only. It should not be construed as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.