US Taxpayers who receive Foreign Gifts from Foreign Persons More than $100,000 (from Non-Resident Alien(“NRA”) or Foreign Estate, which includes foreign persons related to NRA or Foreign Persons related to Foreign Estate) or more than $15,601(as gifts from foreign corporation/partnerships) must file Form 3520 and declare those gifts annually or be subject to penalties. The penalty for failure to report the gifts are 5% of the amount of the foreign gifts for each month for which the failure to report the gift continues (not to exceed a total of 25% of the gift).
To calculate the over $100,000/$15,601 threshold the US Taxpayer must aggregate the gifts from the NRAs/Foreign Estates (Partnerships/Corporations). The test Is whether the US Taxpayer gift recipient “knew or had reason to know the gift was from a foreign person/estate/entity). In addition, the US Taxpayer test includes do they know or have any reason to know that the foreign donor in making any gift was acting as a nominee or intermediary for any other person.
The penalty for Foreign Gifts is imposed if IRS From 3520 is not timely filed. The Form 3520 filing is due with the income tax returns due for taxpayer (subject to extensions). If the complete Form 3520 is not timely filed by the due date (including extensions), the time for “assessment of any tax imposed with respect to any event or period will not expire “before the date that is 3 years after the due date on which the required information is reported” (IRC 6501(c)(8).
This tax rule enacted as part of the Foreign Account Tax Compliance Act (March 2010, enacted as part of the HIRE ACT (Hiring Incentives to Restore Employment Act), amended the prior law and made the entire income tax return (not just the Form 3520) suspended until 3 years after the due date on which the required information for Form 3520 due for the foreign gift is reported.
IRC 6039 F governs the reporting of large gifts received from foreign persons. Under IRC 6039 F (a) a “foreign gift” means any amount received from a person other than a US person which the recipient treats as a foreign gift. Under 6039 F (c) (1) (A) (B): If the US person fails to furnish the information required (by the Secy. of the Treasury)
(A) the tax consequences of the receipt of such gift shall be determined by the Secy of the Treasury.
(B) such US person shall pay (upon notice and demand by the Secy. and in the same manner as tax) an amount equal to 5% of the amount of such foreign gift for each month for which the failure continues (not to exceed 25% of such amount in the aggregate).
Under 6039 F (c) (2), the penalty shall not apply “to any failure to report a foreign gift if the US person shows that the failure is due to reasonable cause and not due to willful neglect.”
Foreign gifts do not include a gift to a US person for any payment made for qualified tuition or medical payments on behalf of a US person.
Under IRC 672 (f) (4), in the case of any transfer directly (or indirectly) from a partnership or foreign corporation which the transferee treats as a gift, the Secy. of Treasury may recharacterize such transfer to prevent avoidance of the purposes of this subsection.
Under IRC 6662 (j) there is an accuracy-related penalty imposed for underpayment of tax required to be shown on a tax return. There shall be added to the tax an amount equal to 20% of the portion of the underpayment of tax.
Under IRC Sec. 6662(j) if there is an undisclosed foreign financial understatement i.e. Under IRC 6662 (j)(1) an understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset, the penalty is 40% (not 20%) of the underpayment of tax attributable to any “undisclosed foreign financial asset”.
If the gift is received in an offshore bank account and is over $10,000 the recipient may be required to file Fincen Form 114 (FBAR filing) to report the foreign gift or be subject to a 50% per year civil penalty (based on the highest value for the off-shore account for the tax year) and a maximum 10 years in jail as a criminal penalty for each year not filed.