Reporting Requirements for Recipients of Foreign Gifts

​Rödl & Partner Tax Matters Vol 2022 – 7 (first published 2017)

If the value of aggregate foreign gifts that you receive during any tax year exceeds a threshold amount, each foreign gift must be reported to the IRS. A foreign gift is any amount received from a non-U.S. person which is treated as a gift or a bequest. A non-U.S. person is any person other than a citizen or resident of the U.S. or a U.S. partnership or corporation. The term non-U.S. person also includes a foreign estate. Foreign gifts don't include qualified tuition or medical payments made on behalf of the recipient or gifts which are otherwise properly disclosed on a return under the separate requirements applicable to amounts received from foreign trusts.

For purposes of determining whether the receipt of a gift from a foreign person is reportable, different reporting thresholds are applied for gifts received from nonresident alien individuals and foreign estates, as compared to gifts from foreign partnerships and foreign corporations. A U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the total amount of gifts from that nonresident alien or foreign estate exceeds $100,000 during the tax year. To calculate the threshold amount, the recipient must aggregate gifts from nonresident aliens or foreign estates that are related to each other. Once the $100,000 threshold has been met, the one who receives the gift must separately identify each gift which is more than $5,000 but doesn't have to identify the donor(s).

A U.S. person must report the receipt of purported gifts from foreign corporations and foreign partnerships if the total amount of purported gifts from all such entities during the tax year is more than $10,000, subject to cost-of-living adjustments (the minimum amount is $17,399 for tax years beginning in 2022). Once the threshold has been met, the gift recipient must separately identify all purported gifts from a foreign corporation or foreign partnership and provide the name of the donor(s).

If a recipient falls within these reporting rules, a Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed. The form is due on the due date of the recipient's income tax return for that year, including extensions.

Where appropriate, we may be able to recommend planning approaches which could allow avoidance of the reporting requirements. For example, if a gift of $120,000 is expected from a nonresident alien individual or foreign estate, it may be possible to arrange for the gift to be paid over two years, so that in neither year does the gift exceed $100,000. If the split gift is the only foreign gift received each year, the reporting requirement will be avoided. Alternatively, if we can arrange for part of the gift to be made in the form of qualified tuition or medical payments, the rest of the gift may be reduced enough to avoid the reporting requirement.

The penalty for not reporting a reportable foreign gift is 5% of the amount of the gift for each month the failure to report continues, up to a maximum of 25%. The penalty will be excused if reasonable cause for the failure to report can be established.

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