Certain events, such as when a U.S. taxpayer receives a gift from a foreign person, trigger an international tax filing requirement. This event triggers the requirement to file form 3520. In general, the Form 3520 is merely an informational return, as foreign gifts typically do not result in tax consequences for the taxpayer. However, there are some significant penalties for failing to file a Form 3520 in connection with a foreign gift (1).
What is a Foreign Gift?
A foreign gift is money or other property received by a U.S. taxpayer from a foreign person. To be considered a foreign gift, the recipient must elect to treat the property or money as a gift or bequest, and exclude the amount from gross income. Note, however, that amounts paid for qualified tuition or medical payments made on behalf of a U.S. person are not considered gifts from a foreign person and may not necessarily be excluded from gross income. For these purposes, a “foreign person” is defined by the IRS as a nonresident alien individual, or foreign corporation, partnership or estate (2).
What are the Reporting Requirements for Foreign Gifts?
If you receive foreign money or property that you are electing to treat as a foreign gift or bequest, you must file a Form 3520, Annual Return to Report Transactions and Receipt of Certain Foreign Gifts (2). 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) must be reported on Form 3520. Gifts from related parties must be aggregated to meet the $100,000 threshold for reporting the transactions. For example, if a U.S. taxpayer receives $50,000 from nonresident alien A and $60,000 from nonresident alien B, and A and B are related, then the $110,000 that the taxpayer receives must be reported as one transaction on Form 3520.
What are the Penalties for Failing to File Form 3520?
As a taxpayer required to file Form 3520 may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate. The penalties vary depending on the event triggering the Form 3520 requirement. In the case of a foreign gift, 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%).
How a Tax Attorney Can Help
If you receive gifts of money or property from foreign sources, you may have reporting obligations of which you are not even aware and you may require international tax services. In order to fully understand and evaluate the options available to you and your complicated tax situation, you should consider working with an experience tax attorney.
Original Source By: William D. Hartsock
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