Gift From Foreign Person
Gift From Foreign Person: The gift from foreign person rules are complex. A gift from a foreign person is reportable to the IRS, if it meets the threshold requirements for filing. The form is IRS Form 3520, and there are three (3) catalysts, including: a gift from a foreign individual, foreign entity, or foreign trust distribution. The threshold requirement for reporting the gift(s) will differ depending on the who issued the gifts. The are strict IRS requirements for reporting gifts from a foreign person to a U.S. person. Non-compliance with reporting the gift may have IRS consequences. In recent years, the Internal Revenue Service has increased the aggressive enforcement of foreign accounts compliance — including foreign gifts. The failure to report offshore accounts, assets, investments and gifts may result in fines and penalties. These penalties can be ablated with reasonable cause and voluntary disclosure.
Foreign Gifts & the IRS
The gift from foreign person rules are complex. Notwithstanding the more complex tax issues, such as the annual gift exclusion and U.S. situs, there are generally two aspects to this analysis:
- U.S. Tax Treatment of the Gift; and
- IRS Reporting Requirements of the Foreign Gift
The reporting aspect is relatively straightforward. When a U.S. Person receives a gift from a foreign person, the U.S. Person:
- Reports the Gift (if the thresholds are met) on Form 3520
- Does not pay tax on the receipt of the gift
- Pays Tax on income generated from the gift.
*The issue is not specifically about receive a foreign gift. Rather, it is about receive a gift from a foreign person.
Gift Reporting on Form 3520
If a foreign person was to gift a U.S. person $250,000 equivalent of non-U.S. property, the U.S. person’s reporting requirement would be limited to filing a Form 3520 (absent other facts). And, the United States has no reach over the foreign person who issued the foreign gift.
Because as foreign persons who are not otherwise subject to US tax or US tax laws (aka no U.S. property owned), the Internal Revenue Service and government as a whole have no right to enforce U.S. gift and estate tax “rules” against them.
Is it Taxable?
Generally, there is no income tax on the gift. There may be estate tax, and/or resulting tax on income the asset generates after you receive it — but the mere receiving a gift from foreign person is not taxable.
Here is a Common Example:
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.
Tax on Gift From Foreign Person Example 1: No Income
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 (reported on Form 3520)
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.
Example 2: Neil From India Example 2: Income Included
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.
When is the Gift Reported to the IRS?
A Form 3520 is filed in three types of situations:
The most common situation is when a person receives a gift from a foreign person in which the value of the gift exceeds $100,000 in a year. It is important to note that it does not matter whether it was one transaction, or a series of transactions from the same person (Read: transfers from Taiwan split amongst 20 different people to circumvent currency restrictions). If a person receives more than $100,000 in a gift from a foreign person (even if the person is using conduits), then he or she will have to file a form 3520.
The second common situation is when a person receives a gift from a foreign business. If the amount of the gift from the foreign business exceeds $15,671 in any given tax year, then the same form must be filed.
The third, situation involves trust reporting. It should be noted that the IRS is not a huge fan of foreign trusts for many different reasons. Most notably, as a true foreign trust, the IRS does not have much stronghold over the trust itself. In order to amplify the reporting rules, the Internal Revenue Service requires the recipient of any amount of a trust distribution to be reported on form 3520.
Penalties for non-filing of Form 3520
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.
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