Nothing misses the reach of the Internal Revenue Service (IRS) when it comes to tax filing or reporting – especially if it comes from a foreign source. U.S. taxpayers often assume that only gifts distributed by them need to be reported to the IRS. However, IRS rulings cover foreign gifts received as well, so they must be disclosed properly.
Following on from our previous article (Gifts and the Gift Tax Return), the AG Tax team will now examine the tax implications of giving and receiving foreign gifts, which may be useful to U.S. taxpayers as year-end approaches.
What is a foreign gift?
According to the IRS, a foreign gift is money or property (excluding qualified tuition or medical payments) received by a U.S. person from a non-U.S. entity (non-resident alien person, corporation, partnership, trust or estate) that the recipient treats as a gift or bequest and excludes from gross income.
Please note that gifts from foreign trusts are subject to different rules than foreign gifts and will not be covered in this article.
What is Form 3520?
Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) is an information return, on which the US person discloses to the IRS any foreign gifts they received during the tax year. It is not a tax return, as foreign gifts are not subject to income tax.
Who needs to file Form 3520?
Any U.S. taxpayer receiving money or property from a foreign entity as a gift in excess of the threshold limit needs to file the foreign gift tax return. The threshold limit is:
• $100,000 or more from a foreign individual or estate (including foreign persons related to that individual or estate), or
• $15,102 or more (for 2013, adjusted annually for inflation) from a foreign corporation or partnership (including foreign persons related to that corporation or partnership).
When should Form 3520 be filed?
The due date for Form 3520 is the same as the due date for the annual income tax return, including extensions. Only one Form 3520 needs to be filed for all reportable foreign gifts and bequests received during a taxable year.
What are the penalties for failure to file Form 3520?
Any U.S. recipient who fails to file Form 3520 on time (or has filed an incomplete form) could be liable for a penalty of 5% of the gift’s value for each month they fail to report, up to a maximum of 25%. The recipient may also be penalized if the IRS finds discrepancies in the form filing.
The IRS is closely monitoring all foreign transactions in order to prevent taxpayers from evading taxes. Just like the FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act), foreign gift reporting is equally important. It is strongly recommended that a taxpayer consults his/her tax advisor regarding any foreign gifts and other transactions.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
