A “foreign person” is a non-resident alien individual or foreign corporation, partnership, or estate. Gifts to foreign persons are subject to the same rules governing any gift that a U.S. citizen or resident makes. U.S. citizens and residents are subject to a maximum gift tax rate of 40% with exemption of $5 million indexed for inflation.
The tax applies to all transfers by gift of property, wherever situated, by a U.S. citizen or resident, to the extent the value of the transfers exceeds the amount of the exclusions authorized by section 2503 (unified credit against gift tax) and the deductions authorized under section 2522 (charitable and similar gifts) and 2523 (gift to spouse). The gift tax does not apply to any transfer by gift of intangible property by a nonresident and noncitizen of the United States (whether or not he was engaged in business in the United States), unless the donor is an expatriate or certain other rules apply.
File Form 709 each year you make a taxable gift (to anyone) and include it with your regular tax return. Generally, you must file Form 709 no earlier than January 1, but not later than April 15, of the year after the gift was made.
What Are the Tax Consequences of Receiving a Gift from a Foreign Person?
The IRS defines a “foreign gift” as money or other property received by a U.S. person from a foreign person, foreign estate, foreign corporation, or foreign partnership that the recipient treats as a gift and can exclude from gross income. Foreign gifts are subject to U.S. gift tax rules only if the asset transferred is situated in the United States (referred to as “U.S. situs” property). Whether property is U.S. situs is defined by sections 2104 and 2105 of the Internal Revenue Code.
However, regardless of whether property is U.S. situs (and thus subject to U.S. gift tax rules), you must report foreign gifts from foreign persons or foreign estates of more than $100,000 on IRS Form 3520. Further, you must report foreign gifts from foreign corporations or foreign partnerships of more than $16,649 (as of tax year 2020) on Form 3520. This value is adjusted annually for inflation.
File Form 3520 each year you receive a foreign gift separately from your income tax return by following the directions in the Instructions to Form 3520. In general, the due date for a U.S. person to file Form 3520 is the 15th day of the 4th month following the end of the U.S. person’s tax year.
Reporting is required regardless of where the funds are deposited, but additional reporting requirements may be triggered depending on where that is. There are foreign bank account reporting requirements, commonly referred to as “FBAR,” should the funds be deposited into a foreign bank account owned by you. This deposit would be reported on Form FinCen 114. If the value of your foreign bank accounts exceeds $300,000, you will also have to file Form 8938, Statement of Specified Foreign Financial Assets.
What Happens if I Don’t File Form 3520?
You can be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest if you’re required to file Form 3520 but fail to do so. Essentially, failure to file Form 3520 can lead to substantial penalties being imposed on the foreign gift that you would otherwise avoid.