Gifts from St. Nicholas, a Greek resident (even if he has a factory in the North Pole), may not be taxable to you, but can nonetheless give rise to IRS reporting obligations. Specifically, if you are a U.S. person and receive foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required.
General Rule: Foreign Gifts
In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a nonresident alien individual or foreign corporation, partnership or estate.
If you fail to file Form 3520, the penalties can be steep. Generally, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).
You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest. You must include on Form 3520: (a) Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or (b) Gifts valued at more than $15,358 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
You must aggregate gifts received from related parties. For example, if you receive $60,000 from Santa and $50,000 from Mrs. Claus, you must report the gifts because the total is more than $100,000.
You must file Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year.
Curing Failures to File Form 3520 in Prior Years
If you have failed to report foreign gifts in prior years, there are ways to avoid or minimize potentially applicable penalties. It is often the case that individuals with Form 3520 obligations also have other reporting requirements that may not have been complied with. Accordingly, if you believe that you might have current or past Form 3520 obligations, don’t let the IRS be the Grinch that stills your Christmas. Instead, speak with a tax professional about complying with current requirements and curing past reporting omissions. If you have failed to file Form 3520 (or other Forms related to foreign assets or accounts), time is of the essence if you want to avoid penalties. If the IRS discovers the errors before you fix them, your opportunity to avoid or minimize penalties may be lost.