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Gifts from Foreign Person & IRS Reporting

Gifts From Foreign Person & IRS Reporting: 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 for filing, the U.S. Person must report the Gift on Form 3520.

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.

Why?

Because the gift came from your dad, despite how he needed help from others to facilitate the transfer.

Examples of Foreign Gift Reporting & Tax

Example 1: Tax on Gift with No Income Generated

Michelle is a U.S. person.

Her Parents are Taiwanese.

Michelle graduated medical school and her parents transferred her $800,00 to buy a house.

Is the Gift Taxable?

No, the gift is not taxable — but it 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 $200,000 worth of fixed deposits (FDs) in India.

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.

In addition, Neil wiill have an FBAR Reporting Requirement.

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 five (5%) percent of the gift per month, up to a maximum penalty of 25 percent of the gift.