IRS Foreign Reporting & Tax Example (2018) – Offshore Accounts, Assets & Gifts
A common international tax question receive (especially around tax time) is how the IRS foreign account, income, tax and reporting rules work.
More specifically, what happens if I report the information incorrectly (or not report it at all)…and the IRS finds out?
International Tax vs. International Reporting
Paying tax and reporting your foreign account, asset, income and investment information are two separate issues.
Oftentimes, a person may have to report a foreign account or financial asset to the IRS, but that does not mean it will have to pay tax on that item.
This is especially true when the person receives a gift from a foreign person – although it can often lead to much more complex reporting issues.
Example: Foreign Gift, Bank Account & Foreign Income
Let’s take a simple example: Your grandma is from Portugal. She lives in Portugal, she’s a Portugal citizen and has never stepped foot in the United States. You on the other hand are a Legal Permanent Resident (Green-Card Holder) living in the United States, and finishing up your studies.
You pass the bar exam (Good Job) and your grandma would like to give you a gift of $200,000 so you can purchase your first small studio apartment. The gift is in the form of cash and it was placed into a foreign bank account you have in Portugal (where you are originally from).
Is there any Tax?
No. Merely receiving a gift from a foreign person is not taxable, because it is not income.
Does Your Grandma Have to Report it to the IRS?
No, the IRS cannot come after your sweet grandma. Since she is a foreign person and gifting you foreign money (non-U.S. Situs), the IRS has no right or jurisdiction to ask your grandma anything.
Do You Have To Report to the U.S. Government?
Yes, in this type of situation you may have several reporting requirements, which Again is different than paying U.S. Tax:
Form 3520 Gift
Since you received a gift from a foreign person, and the gift exceeded $100,000 in the tax year, you have to report to gift on a form 3520.
Since you are considered a “US person” and now have a foreign bank account that had more than $10,000 in it on any given day of the year (even if only for a day before transferring the money to the U.S.) you also have to report the foreign account (along with any other foreign accounts you have) on an FBAR. In addition, if any interest accrued on the account, you would have to report that as income as well.
Since you’re a single guy living it up, you have to file your taxes as a single person. The threshold requirement for filing a form 8938 when you are single (and a non-foreign resident) is if you have more than $50,000 on the last day of the year, or $75,000 in the accounts, on any given day of the year (if you have less than $50,000 on the last day of the year)
**Unlike the FBAR, the definitions of specified foreign assets in accordance with form 8938 are more ambiguous, and there may be some wiggle room for reporting foreign accounts — depending on the specific type of foreign bank account, and how it is held (branch vs. wholly owned subsidiary). In reality, it is not worth playing piddle paddle with the IRS. And, since most likely the IRS would determine the account was reportable – you should just reported under most circumstances.
Other Reporting Forms
This was just one very basic example and you can see how a mere gift of more than $100,000 from a foreign person may result in the filing of three different forms and possible tax liabilities.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.