By Laura Johnson, EA
Generally, only donors – that is, gift givers – disclose their gifts to the IRS. But if the gift giver is a nonresident alien, an U.S. gift recipient may have to report the gift to the IRS, or face substantial penalties for failure to do so.
Who must file?
If you are a US person who receives during the year:
-more than $100,000 from a nonresident alien individual or a foreign estate, including gifts and bequests
-more than $15,797 from a foreign corporation or partnership that is treated as a gift
You are required to report the gift by filing Form 3520.
Who is a nonresident alien?
If you are NOT a resident of the U.S. you are a nonresident, simple enough. If you are NOT a U.S. citizen, you are an “alien.” Your uncle, who is a Hong Kong citizen and lives in Singapore, is a nonresident alien. Your mother, a U.S. citizen living in France, is NOT a nonresident alien.
Is any tax due with the form?
Form 3520 is a disclosure form and no tax is due.
Why disclose the gift at all? What are the penalties for non-disclosure?
The penalties for failure to report certain foreign gifts are severe: five percent per month, up to 25 percent of the gift amount. Ouch!
What if I received a foreign gift but didn’t know I had to notify the IRS?
The IRS can waive the penalties for failure to file Form 3520 for reasonable cause. Reasonable cause is examined on a case-by-case basis, taking into account the facts and circumstances of the taxpayer’s particular situation.
Further, the IRS currently operates a program called the Delinquent International Information Return Submission Procedures under which a taxpayer can have more confidence that penalties will not apply. Generally, these procedures involve filing the delinquent returns with a statement of all facts establishing reasonable cause for failure to file, along with a certification that any entity for which the information returns are being filed was not engaged in tax evasion.
Here are some factors the IRS may look to in assessing reasonable cause:
-whether the taxpayer acted in good faith
-if the taxpayer exercised ordinary care and prudence
-did they consult competent professionals for advice, for example an attorney or tax advisor
-first time mistakes
-education and sophistication of the taxpayer
-extraordinary circumstances, such as death, injury or illness
At John Schachter + Associates we help our clients report foreign gifts and steer clear of the onerous penalties. Talk to us. Let us know how we can help you!