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Tax Reporting for Larger Gifts or Inheritances from Foreign Persons

Services: Tax

By: Ranju Poudel

All inheritances and gifts received by U.S. persons from foreign persons that exceed $100,000 in a calendar year are reportable to the IRS on Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The amount and description of the bequest must be disclosed. However, the IRS does not require disclosure of the identity of the decedent or donor. A gift does not include any amount paid for qualified tuition or medical payments made on behalf of the U.S. person.

As to the taxation of foreign gifts, the general rule is that gifts from foreign persons are not taxed. Form 3520 is an informational return, reported to the IRS for information purposes only [to report information regarding the gifts or bequests], because foreign gifts themselves are not subject to income tax unless they produce income. Form 3520 is filed alongside the U.S. Federal Tax Return 1040 (for Individuals) and is due on the 15th day of the 4th month following the end of such person's tax year for income tax purposes, which, for individuals, is April 15. When an extension is filed to extend the individual tax return, Form 3520 goes on extension as well.

The thresholds for the reporting vary depending on the source of the gifts or bequests. If gifts or bequests are received from an individual or foreign estate, the gifts or bequests must be reported if the aggregate amount exceeds $100,000 during a given tax year. If a gift is received from a foreign corporation or partnership, the gift must be reported if it exceeds $17,339 during tax year 2022. This amount is adjusted annually for inflation.

A penalty applies if Form 3520 is not timely filed or if the filed information is incomplete or incorrect. A taxpayer may be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest if they are required to file Form 3520 but fail to do so.Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. If the IRS can determine the gross reportable amount, then the penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross reportable amount. However, no penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

The gift and inheritance tax laws of the country where the foreign person or entity making the gift or bequest resides are not a U.S. citizen's concern. The foreign person or entity must consult with tax experts in their own country to address gift and inheritance tax laws on their end. Also, a U.S. citizen can receive unlimited gifts and inheritances from a spouse who is not a U.S. citizen. Gifts of such nature are tax exempt.