Reporting Gifts and Inheritances Received from Abroad

Many people make the mistake of failing to report gifts or bequests from abroad on tax returns, because they do not think gifts are “income”. This can be a costly mistake, however, subjecting the recipient to hefty tax penalties which could easily have been avoided with some qualified tax advice.

The little publicized tax rule with big financial consequences

The tax rules regarding gifts and inheritances received from individuals outside the U.S. aren’t well-publicized . If you are a U.S. Citizen or resident, you are not only responsible for reporting your foreign income, accounts and overseas property on your annual tax return -- you must also report to the IRS if you receive:

·         A gift or inheritance from a nonresident alien or a foreign estate (including foreign persons related to that nonresident alien or foreign estate) that exceeds $100,000, or

·         A gift of $15,102 or more from a foreign corporation or foreign partnership (including foreign persons related to such foreign corporations or foreign partnerships).

If for any reason you are concerned that the IRS might view a gift or bequest of a smaller amount as foreign income, you may wish to report it regardless of the current thresholds.

Penalties for not filing

An increasing number of foreign account holders are being caught for failing to file returns, filing false returns and for various other types of tax evasion. Although the news is filled with stories of the IRS inspecting foreign accounts and assets – know that gifts and inheritances are being scrutinized as well. In addition to the annual FBAR filing, taxpayers need to be vigilant about other tax issues and general compliance. 

All gifts and bequests received from abroad must be reported on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.  Under Internal Revenue Code § 6677, the initial penalty for not filing a Form 3520, or for providing incomplete or incorrect information on the return, is equal to the greater of $10,000 or 35% of the gross value of the amount received. For late returns, the penalty is 5% of the value of the gift for each month that the gift is not reported, capped at 25%. Additional penalties are imposed for continued noncompliance following the expiration of a 90-day grace period provided in the IRS Notice of Noncompliance – those penalties amount to $10,000 per 30-day period (or fraction thereof).   Note there are defenses to penalty assessments.  As such, you should have a tax attorney review the penalty if it has already been assessed.