Reporting A Gift of Money Deposited into a Foreign Bank Account
Reporting A Gift of Money Deposited into a Foreign Bank Account
Due to currency restrictions in various countries such as Taiwan, it is becoming infinitely more difficult to move money across foreign borders, and into the United States.
Foreign Gift Example
Let’s say you are a Taiwanese citizen who relocated to the United States. You are no longer on F-1, and after landing your first job in the U.S. (congratulations) your parents decide they want to help you out, and offer to fund your first home purchase.
Your Parents Will Visit…A Lot
Since your parents intend on visiting often (so they can hang out with their new grandchild), they want you to purchase a nice, expensive house outside of your price-point — to the tune of $2M to $3M.
You and your parents spoke to a Tax Planning CPA who explained that it is better for the home to be under your name, in case anything was to happen unexpectedly (Estate Tax). Unfortunately, the CPA neglected to discuss gift reporting, FBAR and FATCA.
Due to currency restrictions, your parents want to gift you the money abroad into your Taiwanese account, so they transfer money from their Taiwanese account into your Taiwanese account for you to transfer for escrow.
Unfortunately, those pesky parents have a strong opinion of which home you should buy (hard to argue with them under the circumstances) so it takes about 2-3 years before you find a home and close escrow.
Did You Receive a Gift that is Reported to the IRS
Yes. Even though the money was transferred by Foreign parents, from their foreign account, to your foreign account in order for you to purchase a home in the U.S. — technically, you received a cash gift that exceeded $100,000, so you are required to report it on Form 3520.
Are There Penalties for Not Filing the Form 3520?
“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.”
Reporting the Foreign Account & Interest Income Generated
Technically, the moment you received the money into your account, which was a gift to you — you have a U.S. Tax and Reporting responsibility.
Due to the Amount of Money in the account, you would have to:
- Report the Bank Account of the FBAR (FinCEN 114)
- Report the Bank Account of the FATCA Form 8938 (Unless a limited exception(s) applied
- Report and pay tax on the income
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year.
The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D.
The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Depending on the amount of income generated, and your other U.S. income you already reported, you may be subject to substantial underpayment penalties.
What Can You Do?
Under most circumstances, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
What if You Never Reported?
If you never properly reported your foreign income or accounts, you may qualify for one of the IRS tax amnesty programs/voluntary disclosure programs. You may also qualify for a reduced penalty — or even a penalty waiver!
Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.