If you have received a gift or inheritance from a foreign person or entity, you might be required to file IRS Form 3520.
Consequences of Receiving A Gift or Inheritance
Generally, gifts are not taxable.
But US citizens and residents that have received a gift or inheritance (money or other property) from a foreign person or entity may still need to file Form 3520.
This form can be mandatory even if the gift is not taxable.
What Is A Gift?
Unfortunately, the US tax code does not actually define what is a “gift.”
To make matters more confusing, there are different definitions and tests for what is and what is not a “gift” – one for income tax purposes and another for gift tax purposes.
A Supreme Court case named Commissioner v. Duberstein lays out the test for gifts with respect to income tax – everything comes down to the intent and motivation of the transferor (the person giving a gift).
Was the transferor “disinterested”? Meaning, was the act of giving out of a “detached and disinterested generosity” and from “affection, respect, admiration, charity or like impulses.”
At times, this can be difficult to determine.
Foreign individuals generally means a person who is a nonresident alien for US income tax purposes.
Complications can arise for people receiving an inheritance. Determining whether an estate is foreign or not depends on many factors such as the location of the estate’s assets and the location of its administration. The citizenships and residencies of the executor and beneficiaries also must be taken into account.
Amount of Gift
Form 3520 must be filed by people receiving gifts valued at more than $100,000.
Gifts from related parties (such as your mother-in-law and her brother) must be aggregated when determining if you have reached that threshold.
The threshold for gifts from foreign entities is significantly lower – just $26,338 for 2019.
Failure to Comply
The penalty for failing to file IRS Form 3520 is 5% of the foreign gift for each month non-compliance continues. However, the total penalty may not exceed 25%.
Taxing the Giver
Sometimes, the giver of a gift may owe US Gift Tax.
If you need help in filing Form 3520 or with the rest of your US tax return, please schedule a Tax Evaluation and speak one-on-one with an international tax consultant.