When you receive a gift, you probably assume that you don't have to pay taxes on the value. For the most part, this is correct. Typically, the giver will file taxes on the gift over the exemption amount. But what happens if you receive a gift from a foreign person or a foreign family member?
Gifts from a Foreign Person
Just like with gifts from U.S. individuals and family members, your gift from a foreign person probably isn't taxed. However, individuals in the U.S. may have to disclose large gifts from foreign persons, even family members, if the gift exceeds $100,000.
To disclose the gift, you'll file Form 3520 and fill out Part IV – U.S. Recipients of Gifts or Bequests Received During the Current Tax Year From Foreign Persons. A “gift” doesn't include amounts paid for tuition or medical expenses on your behalf. However, if you receive a distribution from a foreign trust, you'll need to fill out Part III rather than Part IV of Form 3520.
Penalties for Failing to Disclose
You could face serious penalties if you fail to disclose a large gift from a foreign person on Form 3520. The initial IRS penalty will typically be the greater of:
- $10,000 or
- Up to 35% of the value of a distribution received from a trust.
For gifts, you could face a penalty of five percent of the value of the gift for each month the failure to report continues, up to 25% of the value of the gift. For example, if you receive a $1,000,000 gift from a foreign national and fail to report it, you could face penalties of up to $250,000, which is 25% of the value of the gift. You can also face additional penalties if the disclosure continues for more than 90 days after the IRS mails a notice of failure to comply with the reporting requirement.
You Need an Experienced Tax Attorney
If you receive a large gift from a foreign person or distributions from a foreign trust or a domestic trust owned in part by a foreign person, it can be challenging to determine exactly what you should report and how you should report it. Don't risk facing fines and penalties from the IRS – you need the guidance of a skilled tax attorney. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.