Foreign Gifts and IRS Reporting
U.S. persons who receive gifts or bequests from foreign persons beware—these gifts or bequests may need to be reported to the Internal Revenue Service (“IRS”). The consequences for failing to do so can be costly.
What Are the General Requirements to Report Foreign Gifts?
For purposes of federal income tax, gross income generally does not include the value of property acquired by gift, bequest, devise, or inheritance.[1] However, a U.S. person who receives foreign gifts that exceed certain threshold amounts during the taxable year must report the gifts on a Form 3520.[2]
Who’s a U.S. Person?
A “U.S. person” includes 1) a U.S. citizen or resident, 2) a domestic partnership 3) a partnership; 4) an estate other than a foreign estate; and 5) a trust if a U.S. court can exercise primary supervision over the trusts administration and U.S. persons have authority to control all substantial decisions of the trust.[3] A “foreign estate” is an estate whose income is foreign source and not effectively connected to the conduct of a U.S. trade or business.[4]
What’s a Foreign Gift?
Generally, a gift is a transfer of money or property that proceeds from a “‘detached and disinterested generosity’” and “‘out of affection, respect, admiration, charity or like impulses.’”[5]
A “foreign gift” is “any amount received from a person other than a U.S. person which the recipient treats as a gift or bequest.”[6] However, the term doesn’t include any amount paid on behalf of an individual as tuition to an educational organization for the education or training of the individual or to any person who provides medical care with respect to the individual.[7] The terms also doesn’t include any amount that a U.S. person is required to report as a distribution from a foreign trust (probably because these distributions generally would have to be reported on a Form 3520 anyway).[8]
What Foreign Gifts Need To Be Reported?
The reporting requirement differs based on whether the donor of the gifts is a nonresident alien individual, foreign estate, foreign corporation, or foreign partnership.[9] If the donor of the gifts is a nonresident alien individual or foreign estate and the aggregate value of the gifts that the U.S. person receives from that nonresident alien individual or foreign estate during the taxable year exceeds $100,000, then the U.S. person must separately report each gift exceeding $5,000 that the U.S. person received from that nonresident alien individual or foreign estate during that year.[10]
On the other hand, if the donor of the gifts is a foreign corporation or foreign partnership and the aggregate value of the gifts that the U.S. person receives from that foreign corporation or foreign partnership during the taxable year exceeds a certain inflation-adjusted amount (which in 2022 is $17,399), then the U.S. person must report separately report each gift that the U.S. person received from the foreign corporation or foreign partnership during that year.[11]
To determine whether a U.S. person has received gifts that exceed one of these thresholds, the U.S. person must aggregate gifts from foreign persons that the U.S. person knows or has reason to know are related.[12]
When Does A Form 3520 Need To Be Filed?
Generally, the date for filing a Form 3520 is “the 15th day of the 4th month following the end of such person’s tax year for income tax purposes, which, for individuals, is April 15.”[13] If the U.S. person obtains an extension of the time for filing an income tax return, “the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year.”[14]
What Are The Penalties For Failing To File A Form 3520?
If a U.S. person fails to file a timely Form 3520 with respect to such gifts, the U.S. person is required to “pay (upon notice and demand . . . and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).”[15] In addition, the Secretary of the Treasury is authorized to determine the tax consequences of any foreign gift that was required to be reported but that was not.[16]
A defense to the assertion of penalties and/or re-characterization for failure to report a foreign gift exists if the U.S. persons establishes that the failure is due to reasonable cause and not due to willful neglect.[17]
Conclusion
If you’ve received, or are going to receive, a foreign gift or bequest and need help determining the tax consequences, don’t hesitate to contact us for a consultation.
International and Offshore Tax Compliance Attorneys
Need help with tax issues? Contact us as soon as possible to discuss your rights and the ways we can assist in your defense. We handle all types of cases, including complex international & offshore tax compliance. Schedule a consultation or call (214) 984-3000 to discuss your international tax concerns or questions.
[1] 26 U.S.C. § 102(a). For some exceptions, see infra note 16.
[2] See id. § 6039F(a); I.R.S. Notice 97-34, VI (June 2, 1997); Instructions to Form 3520 at 1 (2021).
[3] 26 U.S.C. § 7701(a)(30)(A)-(E).
[4] Id. § 7701(a)(31)(A).
[5] Comm’r v. Duberstein, 363 U.S. 278, 285 (1960) (quoting Comm’r v. LoBue, 351 U.S. 243, 246 (1956), and Robertson v. U.S., 343 U.S. 711, 714 (1952)).
[6] 26 U.S.C. § 6039F(b).
[7] See id. §§ 2503(e)(2), 6039F(b).
[8] See id. §§ 6039F(b), 6048(c); I.R.S. Notice 97-34, V; Instructions to Form 3520 at 1.
[9] I.R.S. Notice 97-34, VI.B; Instructions to Form 3520 at 1.
[10] I.R.S. Notice 97-34, VI.B.1; Instructions to Form 3520 at 1, 12.
[11] See 26 U.S.C. § 6039F(a), (d); Rev. Proc. 2021-45, 3.47 (adjusting the amount in 26 U.S.C. § 6039F(a) for inflation); I.R.S. Notice 97-34, VI.B.2; Instructions to Form 3520 at 1, 12.
[12] I.R.S. Notice 97-34, VI.B.3; Instructions to Form 3520 at 1, 12. For these purposes, foreign persons that are related include:
- brothers and sisters (whether by whole or half-blood), spouses, ancestors, and lineal descendants;
- corporations that are part of the same controlled group;
- an individual and a corporation when the individual owns more than 50 percent of the value of the corporation’s outstanding stock;
- a grantor and a fiduciary of a trust;
- a fiduciary of a trust and a fiduciary of another trust, if the same person is the grantor of both trusts;
- a fiduciary of a trust and a beneficiary of the trust;
- a fiduciary of a trust and a corporation when the trust or the trust’s grantor directly or indirectly owns more than 50 percent in value of the corporation’s outstanding stock;
- a corporation and a partnership if the same persons own more than 50 percent of the corporation’s outstanding stock and more than 50 percent of the partnership’s capital or profits interest;
- an S corporation and an S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;
- an S corporation and a C corporation if the persons own more than 50 percent of the outstanding stock of each corporation; or
- an executor of an estate and a beneficiary of such estate.
See I.R.S. Notice 97-34, VI.B.3 (referring to the definition of “related person” in section 643(i)(2)(B) of the Internal Revenue Code); 26 U.S.C. §§ 643(i)(2)(B) (stating that persons are related if they have a relationship that would result in a disallowance of losses under sections 267 or 707(b) of the Internal Revenue Code), 267(b)(1)-(13), (c)(1), (2), (4); Instructions for Form 3520 at 5.
[13] Instructions to Form 3520 at 2.
[14] Id.
[15] 26 U.S.C. § 6039F(c)(1)(B).
[16] Id. § 6039F(c)(1)(A). The Secretary elsewhere has the explicit authority to re-characterize a direct or indirect transfer from a partnership or corporation that the transferee as a gift or bequest. Id. § 672(f). For instance, if U.S. person receives a purported gift or bequest from a foreign corporation, the purported gift or bequest generally must be included in the U.S. person’s gross income as if it were a distribution from the foreign corporation. 26 C.F.R. § 1.672(f)-4(a)(2). Likewise, a partnership’s direct or indirect transfer of a purported gift to a U.S. person generally must be included in the U.S. person’s gross income as ordinary income. Id. § 1.672(f)-4(a)(1). For these purposes, a “purported gift” means any transfer of property to a person who is not a partner in a partnership or a shareholder of a foreign corporation (or to a partner/shareholder if the amount of the transfer is consistent with the partner’s/shareholder’s interest in the partnership/corporation) when the aggregate amount of such transfers to the United States person is at least $10,000 during the taxable year. Id. § 1.671(f)-(d)(1), (f). Related party rules similar to those to determine whether a Form 3520 must be filed apply here. See id.; 26 U.S.C. § 643(i)(2)(B)(i).
[17] 26 U.S.C. § 6039F(c)(2).
