With globalization, several families are spread around the world. Many foreign nationals move to the United States to pursue their education, a career or simply to live “The American Dream.” When those foreign nationals become US residents for tax purposes, they are taxed on their worldwide income, regardless of where the funds are coming from. The general rule is that gifts, whether non cash, inheritance, or money, are not taxed to the individual receiving them. However, when the gift is coming from a foreign person the rules are quite different, which my catch a lot of taxpayers by surprise.
The Difference Between a Foreign Gift and a Gift from the US
The main difference between a gift from a foreign person and a gift from a US person lies on the recipient’s tax obligation. If a taxpayer receives a gift from a US person (US citizen or resident), then there is no obligation to report the gift received. For the sender of the gift, taxes are imposed if the amount gifted is over the exemption, which for 2018 is $14,000 per person ($28,000 if married filing jointly).
If the gift received is coming from a foreign person (nonresident alien) and is value exceeds $100,000, then the recipient must file Form 3520 with the IRS. No taxes are due, but the recipient of the gift needs to inform the IRS about the gift received to avoid any potential liabilities.
Note that the same is true if a US tax resident receives a foreign inheritance.
What Needs to be Reported
US taxpayers must report gifts and bequests from foreign individuals that exceed $100,000 or gifts from foreign corporations or foreign partnerships that exceed $16,111 (in 2018). Gifts received from related parties need to be aggregated in order to determine whether the amount surpasses the $100,000 threshold. For example, if a US person receives $50,000 from foreign person A and $70,000 from foreign person B, and he or she knows or has reason to know the two nonresidents are related, he or she must report the gifts because the aggregate value of the gift is over $100,000.
Form 3520 is an informational return and it serves to inform the Government about the gift received. The Form is due on April 15th and is usually submitted with an income tax return. Extensions apply if one was filed for the income tax return.
A foreign gift does not need to be reported if the funds are used to pay for medical bills or qualified tuition. Note that the funds must be paid directly to the institution.
US residents receiving foreign gifts must also be aware that if the gift or bequest is being made by a covered expatriate, then the recipient bay be subject to tax. Section 2801 of the Internal Revenue Code imposes a transfer tax on US tax residents who receive gifts or bequests from former U.S. citizens or former green card holders.
Gift from Foreign Person: Failure to Report
Failure to file Form 3520 or failure to file an accurate Form 3520 can generate severe consequences and hefty penalties. The initial penalty is 5% of the total value of the gift. The penalty increases by 5% for each month that the form is not filed, up to a 25% maximum.
Nonetheless, Section 6039F(c)(2) of the Internal Revenue Code provides for a penalty relief if the taxpayer can demonstrate that the failure to file Form 3520 was due to reasonable cause and not willful neglect.
Often, taxpayers are not sure whether they have to file Form 3520. This might happen to an individual that has entered the US on a nonimmigrant visa and is uncertain as to whether he or she has satisfied the substantial presence test, and, therefore, if he or she is considered a resident of the US for tax purposes. The uncertainty might also occur to individuals who received a gift of property and cannot calculate its fair market value, or its fair market value is questionable. If in doubt as to whether you have a filing requirement, filing a protective Form 3520 might be a good solution and a way to avoid the penalties.
If you have received a gift or bequest from a foreign person and does not know if you need to file Form 3520 or if you have failed to file Form 3520 and is wondering what to do next, contact us at Brunoro Law for a 1h free consultation. Our experienced international tax attorney can discuss your case and explain how you can become compliant with the US tax laws.
Posted in: International Tax