Defining a “Foreign Person” for Tax Purposes
Legally, a “foreign person” refers to any individual or entity not recognized as a U.S. citizen, permanent resident, or entity organized under the laws of the United States. This typically includes nonresident aliens, foreign corporations, partnerships, trusts, and estates, as well as other non-U.S. entities. For U.S. taxpayers contemplating giving a gift to a “foreign person,” a thorough understanding of applicable gift tax regulations is essential.
U.S. Gift Tax Applicability
U.S. citizens and residents face a maximum gift tax rate of 40%. This rate applies to gift transfers exceeding statutory exclusions (Section 2503) and permitted deductions (Section 2522 for charitable gifts and Section 2523 for spousal gifts), irrespective of the recipient’s location or nationality.
The IRS provides annual gift exclusions. For 2025, the annual gift exclusion has increased to $19,000 per individual (up from $18,000 in 2024). Married couples can combine their exclusions, allowing a total of $38,000 per recipient in 2025. Additionally, the lifetime gift and estate tax exemption for 2025 stands at $13.99 million.
Taxable Gifts and Reporting Obligations
Gifts of property, including cash, real estate, stocks, securities, and tangible personal property, constitute taxable gifts. U.S. taxpayers must file Form 709, United States Gift (and Generation Skipping Transfer) Tax Return, annually for any taxable gifts made. For gifts transferred in 2025, Form 709 is generally due by April 15, 2026.
Tax Implications of Receiving Gifts from Foreign Persons
A “foreign gift,” as defined by the IRS, is money or property received by a U.S. person from a foreign individual, estate, corporation, or partnership, treated by the recipient as an excludable gift from gross income. Such gifts are subject to U.S. gift tax rules only if the underlying asset is U.S. Situs property, as defined by Internal Revenue Code sections 2104 and 2105.
Regardless of U.S. Situs, reporting obligations apply to foreign gifts. U.S. persons must report foreign gifts exceeding $100,000 from a foreign person or foreign estate on IRS Form 3520. For gifts above this threshold, individual gifts exceeding $5,000 must be separately identified. Gifts from foreign corporations or partnerships exceeding $19,570 for 2024 also require reporting on Form 3520, with separate identification of each gift and donor.
Form 3520 must be filed annually, separate from the income tax return, following its specific instructions. The general due date for U.S. persons to file Form 3520 is the 15th day of the fourth month following the end of their tax year.
While reporting is mandatory irrespective of fund deposit location, additional requirements may arise. Funds deposited into foreign bank accounts may trigger Foreign Bank Account Reporting (FBAR) obligations, filed on FinCEN Form 114. Moreover, if the cumulative value of foreign bank accounts surpasses $50,000, Form 8938, Statement of Specified Foreign Financial Assets, must also be filed.
What Happens if I Don’t File Form 3520?
Failure to timely file a required Form 3520 can result in substantial penalties. Penalties may amount to 5% of the foreign gift, capped at 25%. Essentially, neglecting to file Form 3520 can lead to substantial penalties being imposed on the foreign gift that you would otherwise avoid.
If you have questions or would like to discuss a situation where you were involved in gifting to a foreign person, especially concerning the complex tax consequences involved, please contact EPGD Business Law in Miami, Florida. Our experienced attorneys are well-versed in international gift tax laws and can provide the comprehensive guidance and strategic advice you need to navigate these intricate regulations effectively, compliantly, and with complete legal confidence. Reach us at (786) 837-6787 or email us to schedule a consultation.
