Reporting Obligations for Foreign Gifts. What You Need to Know.

If you are a U.S. taxpayer who has received a foreign gift or bequest, it’s important to understand your obligations under U.S. tax law. While foreign gifts are generally not subject to income tax, there are specific reporting requirements that you must follow. Failing to comply with these rules can lead to significant penalties. Here’s what you need to know.

What is a Foreign Gift?

A foreign gift is money or property that a U.S. person receives from a foreign person (nonresident alien individual, foreign corporation, foreign partnership, or foreign estate). The recipient typically treats the item as a gift or bequest and excludes it from their taxable income.

Examples of foreign persons include:

• Nonresident alien individuals

• Foreign corporations, partnerships, and estates

However, it’s important to note that gifts for qualified tuition or medical expenses are not considered foreign gifts and do not require reporting.

When Must You Report a Foreign Gift?

You need to report a foreign gift if the total value of the gift or bequest exceeds certain thresholds in a given tax year. These thresholds depend on the source of the gift:

1. Gifts from Nonresident Aliens or Foreign Estates:

   • If the total value exceeds $100,000, you must report it.

2. Gifts from Foreign Corporations or Foreign Partnerships:

   • If the total value exceeds $16,649 in 2025 (this amount is adjusted annually for inflation), you must report it.

If you receive multiple gifts from related foreign individuals, corporations, or entities, you must aggregate the total amount. For example, if you receive $60,000 from one foreign individual and $50,000 from another, and you know or have reason to believe they are related, the total of $110,000 exceeds the $100,000 threshold, and reporting is required.

How Do You Report a Foreign Gift?

The IRS requires you to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, to report your foreign gifts. This form is not a tax return but an informational return. It’s crucial to file it separately from your regular income tax return.

The due date for filing Form 3520 is the same as your income tax return due date (including extensions), so make sure to file it on time to avoid penalties.

What Happens If You Don’t Report a Foreign Gift?

Failure to file Form 3520 on time, or filing incomplete or inaccurate information, can result in steep penalties. These penalties can amount to a percentage of the value of the foreign gift you received. The IRS has recently revised how penalties are imposed and now reviews each case individually. However, penalties can still be substantial, so it’s essential to stay compliant.

Special Rules for Gifts from Former U.S. Citizens or Green Card Holders

If you receive a gift or bequest from someone who has expatriated (i.e., given up their U.S. citizenship or green card) after June 17, 2008, different rules may apply. These individuals are considered “covered expatriates,” and their gifts or bequests are subject to tax under a separate IRS provision, IRC Section 2801.

In this case, the recipient may be subject to a special tax, and additional forms or filings may be required. It’s important to consult with a tax professional if you are unsure whether the gift falls under these special rules.

Key Takeaways

• Report Gifts Above Thresholds: If you receive foreign gifts above the thresholds mentioned, you must report them on Form 3520.

• File on Time: Be sure to file Form 3520 by the due date of your tax return, including any extensions.

• Consult a Professional: If you are unsure whether your gift qualifies or how to file, it’s always best to consult with a tax professional who is familiar with international tax laws.

Conclusion

Receiving a foreign gift can be a wonderful experience, but it comes with important tax reporting responsibilities. By understanding your obligations and filing the necessary paperwork, you can avoid unnecessary penalties and stay in compliance with the IRS. If you have questions or need assistance with reporting foreign gifts, our tax professionals are here to help.

If you need more personalized assistance or help with your specific situation, don’t hesitate to contact us at:

Phone: 323-902-1000
Email: dmitriy@losangelescpa.org
Website: www.losangelescpa.org