Do I File Form 709, Form 3520 (or Both) to Report Gifts

Do I File Form 709, Form 3520 (or Both) to Report Gifts

Do I File Form 709, Form 3520 (or Both) 

With tax season in full swing, we receive many questions from taxpayers worldwide about the difference between Form 709 (giving a gift) and Form 3520 (receiving a gift). When it comes to gifts, there are a few different IRS tax forms that a person may have to file depending on whether or not they are a U.S. person or a foreign person and whether or not they are receiving a gift from a U.S. person or receiving a gift from a foreign person. The two main tax forms that a person may have to file are Form 709 and Form 3520. Both of the tax forms typically have the same due date when it comes to reporting gifts, but the reporting requirements for each form are different. In general, Form 709 has more detailed requirements when it comes to preparing and submitting the form, whereas Form 3520 oftentimes carries the heftier penalty. Let’s take a brief look at the difference between these two forms.

What is IRS Form 709?

The Form 709 is the more common form that needs to be filed. This form refers to the United States gift and generation-skipping transfer tax return, but for purposes of this brief introduction, let’s just focus on your typical gift. This form must be filed by U.S. persons when they are giving a gift that exceeds the annual exclusion.

• • • For example, let’s say David is a US person who wants to give a gift of $50,000. In the year that he gives the gift, david is required to file a form 709 because the value of the gift exceeds the annual exclusion amount. In 2023 the annual exclusion amount was $17,000 but this value adjusts based on inflation and other factors. The reason why it is important for the taxpayer to file this form is because the IRS keeps tabs on how much the taxpayer has given in gifts so at some point when the taxpayer passes on it will impact the amount of potential estate tax liability that they have.

    • Using the example above, even though the taxpayer gave a gift of $50,000, only 33,000 would apply toward their total gift basket because the 17,000 is excluded.

What if I Receive a Gift From Overseas?

Form 3520 is used for different purposes. The purpose of this form for gift purposes is when a U.S. person receives a gift from a non-resident alien. The idea behind Form 3520 is that because the non-resident alien who is not a U.S. person is not subject to any reporting to the United States, the IRS wants to keep tabs on U.S. persons who receive large gifts because this may impact their estate taxes in the future.

• • • For example, let’s say Michelle is a US person who receives a $15 million gift from a non-resident alien. If Michelle was not required to report this money, then the IRS would not be aware of the assets necessarily and as a result it may result in a tax gap involving estate taxes when Michelle passes away, because if Michelle was to gift some of this money then that would go towards her total gift and estate tax bucket.

Do I file Both Forms?

It is not uncommon for a U.S. taxpayer to have to file both of these forms in the same year.

• • • For example, a taxpayer may receive a large gift from a family member as a result of a foreign inheritance which requires him to file a Form 3520. Likewise, that same U.S. taxpayer may want to give gifts to other family members, and if the gift amount person exceeds the exclusion, then they would have to file a Form 709 as well.

Penalties for Late Reporting

The failure to file Form 709 is not typically a huge deal when it comes to penalties (which are covered under 26 USC 6651). On the other hand, the failure to file Form 3520 can have a serious impact on the taxpayer. That was because the IRS can penalize taxpayers 5% a month up to a total value of 25% of the actual gift. So in a common example where a U.S. person might have received a large gift from a foreign person as a down payment on a home,  a 25% penalty on that amount when there is no unreported income is extremely lopsided and unfair to the taxpayer. Luckily, the IRS has also developed various amnesty programs to assist taxpayers who have not timely filed Form 3520 to get into compliance.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms (such as Form 3520), the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.