When it comes to gifting money and transferring it outside of China, things can get very difficult very quickly. Why? Because in China there is something called currency restrictions.
That means that under currency transfer laws in China, individuals are only allocated a limited amount of money that they can transfer outside of the country annually.
For individuals in the United States receiving money from parents, relatives or friends abroad in China, it can be a trap for the unwary. That is because there are significant reporting requirements for individuals who receive money from abroad.
China Currency Restrictions
Currency restrictions mean that an individual in China is limited in the amount of money they can transfer outside of China in any given year. For example, in 2017 generally an individual in China is not authorized to transfer more than $50,000 outside of China to other foreign nations. This makes it difficult for your awesome grandma in China to transfer you that $500,000 she wanted you to have to purchase your home in the United States.
How Do People Get Around the Restrictions?
Generally, our clients tell us that instead of their grandma transferring $500,000 to them in one fell swoop, their grandma will transfer $50,000 to 10 people in China staggered throughout the year, and these individuals will then transfer the money to the United States.
Sound Easy…It’s Not
Many issues will arise.
First, before transferring the money to the United States usually the recipient in the United States will have opened a foreign account in China to receive the money. This is the first problem, because presumably in our example the recipient in the United States will have more than $10,000 in annual aggregate total overseas during the tax year.
Therefore, the individual is required to file an annual FBAR (Report of Foreign Bank and Financial Account). Moreover, depending on whether the recipient is married filing separate, married filing joint, or single, will determine whether the individual will also have to file an annual FATCA Form 8938.
*The failure to file these forms may result in very high fines and penalties, upwards of $10,000 per account, per year for non-willful violations — and 50% penalty per year for willful violations.
Did your Account Earn Interest?
Even though your foreign account may have only had money in it for a week or two, chances are due to the amount of money in the account you earned a bit of interest. Thus, now you have underreported income that you must also report – and while $20 of interest income is not going to put you on the IRS radar, it will limit your ability to do a delinquency filing as opposed to a Streamlined or Reasonable Cause application.
**In order to a straight delinquency filing you cannot have unreported income.
Don’t Forget IRS Form 3520 for Receiving Foreign Gifts
Yes, even though you received 10 gifts of $50,000 from 10 different people (and therefore none of them actually gifted you more than $100,000 during the tax year), the reality is the $500,000 came from your grandma. Thus, the gift is a $500,000 gift from your grandma and must be reported that year on a form 3520.
While there is no tax liability for receiving a foreign gift, the IRS may penalize you upwards of 35% value of the gift if you did not report it.
Get Into IRS Compliance with Offshore Disclosure
Offshore disclosure is a safe method for getting into compliance. Depending on the facts and circumstances of your case, you may or may not have to pay penalty; each case is different.