One of the outcomes of globalization is dispersed families. Millions of American citizens and residents have close family members that live in foreign countries and thus might have received gifts or inheritances from these foreign individuals. Since gift taxes in the United States are paid by the donor, and federal inheritance tax are paid by the estate, it seems only logical to assume that the US recipient of the gifts would be free from any obligations to report such transactions to the United States Internal Revenue Service (IRS). However, the IRS requires certain information regarding foreign gifts and bequests and punishes those that withhold the information.
To start with the good news, there are two aspects of foreign gift and bequest reporting that make it easier for the recipient to comply with the regulations. First, only gifts and inheritances that exceed $100,000 per year must be reported. Second, the reporting does not have any tax consequences – this is one of these rare instances when the IRS does not want your money, only the information.
The reporting itself at first glance appears to be deceivingly uncomplicated. Only one page of the six-page IRS Form 3520 on which gifts and bequests are reported need to be completed by the recipient. The information about the property received is limited to the very basic facts: date of the gift or bequest, description of the property, and its value.
The bad news is that failure to file Form 3520 can have severe consequences. Specifically, the IRS can assess a penalty of up to 25% of the amount of the gift for noncompliance. We have seen that the IRS automatically assesses this penalty for any Forms 3520 filed after its due date. While it may be possible to have the penalties abated if there is a “reasonable cause” for the delayed filing, it is best to avoid this situation by timely filing Form 3520.
There are many aspects of reporting foreign gifts and inheritances which have not been addressed here in the interest of clarity. Please contact your WG advisor to discuss this area in more depth.