If you timely filed for a tax extension, you have until October 15, 2018 to submit your federal income tax return to the Internal Revenue Service (IRS). However, if you received a foreign gift during the 2017 tax year, you may have additional reporting responsibilities. It is crucial to understand and fulfill these responsibilities, as failure to do so – like any failure to comply with tax laws – could expose you to costly civil penalties. Toward that end, our international tax attorneys present this brief overview of foreign gift reporting requirements. While the information contained in this article will help to provide a starting point, you should always consult with a tax attorney to ensure that you are in compliance with Internal Revenue laws, as each taxpayer’s personal situation is uniquely impacted by the transferor’s tax residency status, whether the transferor has expatriated, and the size of the gift received.
In order to successfully comply with foreign gift disclosure requirements, there are several tax terms you must understand – first and foremost, the “foreign gift” itself.
To quote the IRS’ own explanation, a foreign gift is simply “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.” Thus, it becomes crucial to distinguish “U.S. persons” from “foreign persons” (and to clearly define terms like “bequest” and “gross income”).
For tax purposes, the term “U.S. person” includes all of the following:
In contrast, the term “foreign person” could refer to:
Making a “bequest” is the simply the act of giving away property, money, or other assets – typically items such as securities (stocks and bonds), jewelry, fine artwork, or other valuables. However, tuition and medical payments are generally excluded from the definition of foreign gifts.
Finally, “gross income” is defined to include, but is not limited to, all of the following in accordance with 26 U.S. Code § 61(a):
If the gift you received fits the definitions above, you may need to report it to the IRS depending on several factors, notably (1) whether the gift exceeds certain thresholds, and (2) which type of “foreign person” the gift-giver, or “transferor,” is. These factors are closely intertwined, with the latter directly impacting the former as follows:
There is also a third factor in play: namely, whether the recipient knew (or had cause to know) that the transferor was a foreign person. If the recipient was not aware of this fact, he or she does not need to report the gift. However, because the financial penalties for failing to report foreign gifts can be severe, the recipient would be wise to discuss the applicability of reporting requirements with an experienced tax attorney. As the adage goes, it is always better to be safe than sorry – especially where the IRS is concerned.
This information all leads to an inevitable question: assuming the recipient is required to report the foreign gift, how should he or she meet this requirement?
Foreign gifts are reported on Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). The thresholds referenced above derive from Part IV of Form 3520 (U.S. Recipients of Gifts or Bequests Received During the Current Tax Year from Foreign Persons), the 2017 version of which asks the following questions:
The form then asks the taxpayer to elaborate by, where applicable:
Form 3520 should be attached to your tax return. It must be submitted by either the normal filing deadline, or, where applicable, the extended October due date.
On a final note, it is important for gift recipients to understand that different rules apply to gifts donated by “covered” expatriates, meaning expats who (1) left the U.S. after June 16, 2008, and (2) meet additional criteria, such as having a net worth of or above $2 million. Our tax attorneys for expats can help you understand when expatriates are “covered” and how this status affects your duty to report the gift you received.
For additional information, readers may be interested in referring to the following:
If you received a foreign gift you should review the potential reporting requirements with our international estate planning attorneys. If we determine that the requirements apply to your situation, our knowledgeable team of tax preparation professionals can walk you through every detail to ensure thorough compliance. Remember: the failure to disclose reportable foreign gifts can trigger expensive penalties, making careful adherence to the law essential.
To discuss a foreign gift in a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295. Our tax team includes attorneys, CPAs, and EAs with over 20 years of combined experience in international tax law.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.