Is a Gift From a Foreign Person Reportable?
Gifts From Foreign Person: When a U.S. person receives one or more gifts from a Foreign Person (individual, entity or trust), the recipient may have to report the value to the IRS. There are different threshold requirements for reporting, depending on the value of gift, and who makes the gift. The three categories of foreign persons for gift reporting purposes, include:
- Foreign Individual
- Foreign Entity, or
- Foreign Trust
In recent years, the Internal Revenue Service has increased enforcement of foreign gift reporting and accounts compliance.
The failure to report may result in offshore penalties.
These penalties may be ablated with reasonable cause and voluntary disclosure.
How to Report Gifts from a Foreign Person
The reporting aspect of foreign gifts is relatively straightforward.
When a U.S. Person receives a gift from a foreign person that meets the threshold, the U.S. Person, they must reports the Gift on Form 3520. While the reporting requirements for a gift from a foreign individual are least complex, the reporting of a Foreign Trust distribution can be onerous
Important Practice Tip
If you receive a gift from Taiwan for Example of $600,000 and your Dad needed 12 of their friends to each facilitate the transfer of $50,000 due to currency restrictions, this is still reportable
Because the gift came from your dad, despite how he needed help from other to facilitate the transfer.
Examples of Foreign Gift Reporting & Tax
You just graduate med school (congratulations!)
Your parents back in Taiwan or China are very proud of you, and they want to gift you close to $1MM so you can purchase your first home.
Is the Money Taxable?
Generally, there is no estate tax with a foreign person (residing outside the U.S.) unless U.S. Situs is involved. If the donor resides in the U.S., or is gifting U.S. Property — the rules may vary.
Example 1: Tax on Gift with No Income Generated
Michelle is a U.S. person. Her Parents are Taiwanese. Michelle graduated graduate school and her parents transferred her $800,00 to buy a house. The gift is not taxable, but is reported on Form 3520.
Example 2: Tax with no Income
David’s parents are citizens of China. They are non-US persons and neither of them have ever had any US citizenship, Legal Permanent Resident status or otherwise filed a US tax return (or subject to US tax).
David’s parents gifted him $1 million to purchase a home for him and his new wife.
Unless other facts impacted the scenario, David’s parents would be considered foreign persons and David’s reporting would be limited to filing a Form 3520. The gift is not taxable.
Example 3: Tax on Gift with Income Generated
Neil came to the United States to study on F-1 visa and then transitioned over to an H1B visa. Neil’s parents were very proud of him, so they gifted him $100,000 worth of fixed deposits (FDs).
The fixed deposits are under Neil’s name even though his parents are responsible for depositing withdrawn the money from different institutions — both to get the best tax rate, as well as to reduce any immediate taxation under Indian tax law.
Is Neil’s Gift Taxable?
While the gift itself is still not taxable, the income generated from the FD after it was transferred to Neil is taxable in the U.S.
Penalties for Not Reporting a Gifts From Foreign Person
The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
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 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 Offshore 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 IRS Voluntary Disclosure?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in IRS Offshore and Voluntary Disclosure. Contact our firm today for assistance with getting compliant.