Reporting Foreign Gifts and Inheritance to the IRS: Form 3520

While gifts and bequests from nonresident aliens are usually not taxable, they must be reported to the IRS if they are above a certain threshold.  Generally, U.S. persons who receive the aggregate amount of $100,000 or more in gifts and/or bequests from nonresident aliens or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) during a tax year must report those amounts on Form 3520.  The same reporting requirement applies to U.S. persons who receive a gift of more than $14,165 from foreign corporations (or foreign persons related to such foreign corporations or foreign partnerships).

Failure to file Form 3520 (and even late filing of the form) may result in substantial penalties, unless the taxpayer may demonstrate that failure to comply was due to a reasonable cause and not willful neglect.

It should be noted that U.S. person must also use Form 3520 to report distributions from a foreign trust during the relevant tax year.  Remember, while gifts and bequests are not taxable, the distributions from a foreign trust are generally taxed as income by the U.S. government.

Furthermore, one should remember that receiving a foreign inheritance or a gift may trigger other U.S. tax reporting requirements.  The most prominent of these requirements is the Report on Foreign Bank and Financial Accounts (FBAR). Generally, FBAR is required to be filed by any U.S. person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

For example, if a taxpayer receives an inheritance of $120,000 in 2011 which is then deposited into the taxpayer’s checking account in India, this taxpayer must file both forms 3520 and FBAR.  The likely due date for Form 3520 would be April 15, 2012 whereas the FBAR must be received by the Department of Treasury by June 30, 2012. (Note: Form 3520 and FBAR are both now due in April as of 2017.)

Finally, a note of caution: requirements under Form 3520 may become complex fairly fast.  For example, the exact date of inheritance or gift may be in dispute.  Also, it is possible that some gifts should be reported in a certain way only.  Even the calculation of $100,000 per year may be subject to various interpretations.  Therefore, a help of an international tax attorney should be secured by the taxpayer in order to determine what international tax reporting requirements apply.

Contact Sherayzen Law Office for International Tax Help

If you believe that you may be subject to Form 3520 reporting requirement, contact Sherayzen Law Office now to resolve this situation.  Our experienced international tax firm will guide you through the complex international tax reporting requirements, including voluntary disclosure issues.

Remember, it does not matter whether you are located in another state or outside of the United States – we can help!