When one individual gives property to another without receiving payment in return, the property is generally considered to be a “gift” for tax purposes. Depending on certain criteria, transactions of this nature may be subject to federal or state taxes (currently none in CA) known as “gift taxes.” While gift taxes are typically imposed only upon gift givers, gift recipients are still required to report gifts that meet IRS standards, including certain cash gifts received from foreign citizens. Failure to do so may result in the imposition of severe penalties, making timely and accurate reporting essential. Working with an experienced IRS international estate and gift tax attorney facilitates the reporting process, removing elements of stress and uncertainty while affording you greater protection from civil penalties. In the meantime, this article will help you to understand how gifts from non-U.S. citizens are reported and treated for tax purposes.
Each day, countless U.S. taxpayers receive cash gifts from friends and relatives, some of whom also happen to be foreign citizens. For example, a citizen of Switzerland or expat in Singapore might send cash to a U.S. citizen via wire transfer to a U.S. bank (potentially triggering a tax audit or FATCA penalties in the process).
This scenario is commonplace in a world whose financial systems are increasingly interconnected. However, it also raises important tax questions for both the gift giver (called the “donor”) and the gift recipient (called the “donee”). For example, when a foreign citizen gives a gift to a U.S. citizen, which party is responsible for reporting the gift to the IRS: donor, or donee? At what threshold do gifts become reportable in the first place? And, perhaps most importantly, how do taxpayers report gifts properly, so as to avoid needless IRS penalties? Let’s take a closer look at each of these points.
Penalties for non-filing the 3520 can be draconian. The initial penalty is the greater of $10,000 or— 35% of the gross value of any property transferred to or received from a foreign trust if a U.S. person fails to report the creation of or transfer to a foreign trust or the receipt of a distribution from a foreign trust.
Danger: It is not recommended that an offshore relative wire funds directly into your U.S. accounts. There is a risk the IRS or state tax authority could argue that for the millisecond that the transfer bounced around in U.S. Cyberspace the government had in rem jurisdiction and assert a transfer tax. It is recommended that the U.S. recipient first open an offshore account and that the gift take place offshore and then the funds can be wired back into the U.S. Do not forget to pick any income earned in the offshore account and to report it on an FBAR and form 8938 if applicable.
Most U.S. citizens will never have to deal with the gift tax. However, if you make or receive a foreign cash gift, you should be mindful of the federal regulations governing taxes on gifts and bequests to Americans from expatriates, which will help to ensure your successful compliance. Of course, the most effective way to protect yourself and plan for the future is to work with a knowledgeable expat tax attorney, like those at the Tax Law Office of David W. Klasing. We provide award-winning international estate and gift tax planning services for non-citizens, U.S. citizens, and dual citizens. To set up a reduced-rate consultation with an experienced international tax law attorney, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.
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