Cross-Border Gift Issues and IRS Requirements for US Persons

Cross-Border Gift Issues and IRS Requirements for US Persons

IRS Disclosure Rules for Gifts Received from Abroad

Cross-Border Gift Issues & IRS Requirements for US Persons: When a U.S. person receives a gift, inheritance or trust distribution from a non-U.S. person, they may have to report to the IRS.  But, not everybody who receives a foreign gift or trust distribution files the 3520 Form.  Instead, there are different thresholds for reporting that depend on the amount of money or assets received and the type of foreign person.

In the common situation of receiving a monetary gift from a foreign person such as a parent, it is relatively straightforward. The reporting for a gift from a foreign entity is more complicated, and when foreign trusts are involved, it is much more complex.

In recent years, the Internal Revenue Service has taken an aggressive stance toward non-compliance, and penalties have been on the rise.

If a U.S. person also has offshore accounts, assets, investments or income, they will have additional offshore reporting.

There are numerous reporting forms, with the most common being the FBAR and FATCA Form 8938.  If you are out of compliance, the IRS has developed various tax amnesty programs referred to collectively as voluntary disclosure.

What Form is Required?

The Purpose oft the 3520 is for U.S. Persons to report the receipt of a gift, inheritance or trust distribution from a foreign “Person.”

It is important to note that a Foreign “Person,” is not limited to Foreign “Individuals.” Any U.S. person who meets the threshold requirement for the receipt of a gift, inheritance or trust distribution from a foreign person.

The form 3520 is filed alongside your U.S. Tax Return 1040 (unlike other forms, such as Form 3520-A and 5471, which can have different due dates).

If you need an extension, then you should file an extension to file your tax return. When you apply for an extension for your tax return, your Form 3520 goes on extension as well.

*Form 7004 is for Foreign Trust extension (aka 3520-A)

Example of Who Files Form 3520

Let’s take a simple example:

Gift From a Foreign Individual

Your foreign Grandma in Portugal sent you $150,000 to help pay for a down-payment on your new house. (This meets the +$100,000 reporting requirement from a foreign individual).

Gift From a Foreign Entity

Your dad sent you $40,000 through his foreign business. (This meets the +$16,388 reporting requirement from a foreign entity). 2019 3520 Instructions still in draft form.

Foreign Trust Distribution

If you received a foreign trust distribution, you have to report the distribution amount, even if it is a relatively small amount (no minimum threshold reporting requirement).

Foreign Inheritance

On a sadder note, if you foreign uncle passed away and left you $300,000 that is also reportable, since a foreign inheritance is a type of foreign gift.

Threshold Filing Requirements

The most common scenario is when a person receives a foreign gift, in the form of money or equivalent, from a foreign person. Many countries have various different currency restrictions, which limits the amount of gift an individual can personally provide via transfer (read: China and Taiwan currency restrictions).

With that said, it does not really matter what means the foreign person used to transfer the money to the United States, but rather did that foreign person gift you his or her money.

Threshold for Gifts from a Foreign Person

Currently, if a person receives more than $100,000 from a foreign person in a single year, in either one transaction or a series of transactions then the person who received the gift or inheritance from the foreign person must file a form 3520. It does not matter how the money was transferred, but rather who owned the money that was transferred.

For Example: Scott’s mother in Taiwan transferred him $500,000 in a single year by having 10 of her friends each transfer $50,000 to Scott’s bank account in the United States. Yes, not one individual actually transferred more than $100,000, but the $500,000 originated from a single person who owned that $500,000 and therefore the recipient would report to get from the owner of the money.

Threshold for Gifts From a Foreign Business

The threshold requirement for having to file a form 3520 for the receipt of a gift from a foreign business is much lower than the threshold requirement for receiving a gift from a foreign person. In 2019, the threshold requirement was *$16,388 from either a foreign corporation, foreign partnership or other foreign entity.

Threshold for Trust Distribution

Unlike the receipt of a gift or inheritance from a foreign person, when a person receives a trust distribution from a foreign trust, they are required to complete Form 3520 irrespective of how much the person received from the foreign trust.

In other words, there is no minimum threshold requirement involving a receipt of money from a foreign trust, and therefore any receipt of money from a foreign trust must be reported on a Form 3520.

It should be noted, that unlike the other two categories, the reporting requirement for the receipt of a trust distribution from a foreign trust is much more detailed than the reporting requirement for the receipt of a gift from either an individual or business.

Penalties for Late or Delinquent Filing

As provided by the IRS: Section 6677.   A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause).

Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable):

– 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust.

– 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution.

– 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information.

Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if the foreign trust (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c) and the Instructions for Form 3520-A.

Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.

Don’t Forget FBAR & FATCA

In addition, if the gift was put into a foreign account or used to purchase Foreign Stocks, Securities, or Funds that exceeds the threshold requirements for reporting, the individual may also have to file an FBAR form, Form 8938, and/or Form 8621.

The failure to file these forms may result in significantly high fines and penalties that far outweigh what appears to be a mere failure to report.

Get Into IRS Compliance

If you are seeking to get into compliance for a late filed 3520 there are few different alternatives.

The alternatives will depend on whether the form 3520 is a stand-alone issue, whether there are also other unreported foreign accounts, income, etc. in which the person may consider a streamlined application instead of a reasonable cause submission (presuming of course, that the individual was non-willful and/or had reasonable cause), the amount of unreported gift, inheritance or trust distribution, etc.

Typically, the best option may be for you to enter of the approved IRS Offshore Voluntary Disclosure Programs.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced IRS 3520 Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.