Foreign Gifts and Inheritances

Foreign Gifts and Inheritances

If you are a U.S. citizen or resident alien and you receive a gift or inheritance from a foreign person, then the recipient may need to file Form 3520 with the IRS.

Foreign person

A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary. Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person.

What needs to be reported

IRS requires US taxpayers must report gifts and bequests from foreign individuals that exceed $100,000 or gifts from foreign corporations or foreign partnerships that exceed $16,111 (in 2018) or gifts from a foreign trust distribution regardless of the amount.   

The IRS instructions are here. File a Form 3520 if you receive:

1. Gifts or bequests valued at more than $100,000 received from non-US individuals or foreign estates, including non-US persons related to the non-US individual or foreign estate; or

2. Gifts valued at more than $16,111 in 2018 from foreign corporations or foreign partnerships, including foreign persons related to those foreign entities,

3. Gifts in the form of distributions of loans from a foreign trust, regardless of the amount.

Taxpayers must aggregate gifts received from related parties.  For example, if a US resident receives $40,000 from foreign person A and $65,000 from foreign person B, and he or she knows or has reason to know the two nonresidents are related, he or she must report the gifts because the aggregate value of the gift is over $100,000.

Form 3520 is an informational return and it serves to inform the Government about the gift received. The Form is due on April 15^th and is usually submitted with an income tax return. Extensions apply if one was filed for the income tax return.

A foreign gift does not need to be reported if the funds are used to pay for medical bills or qualified tuition. Note that the funds must be paid directly to the institution.

US residents receiving foreign gifts must also be aware that if the gift or bequest is being made by a covered expatriate, then the recipient bay be subject to tax. Section 2801 of the Internal Revenue Code imposes a transfer tax on US tax residents who receive gifts or bequests from former U.S. citizens or former green card hold

What are the Penalties for Failing to File Form 3520?

As a taxpayer required to file Form 3520 may be penalized if you do not file your Form 3520 on time or if it is incomplete or inaccurate.  The penalties vary depending on the event triggering the Form 3520 requirement. In the case of a foreign gift, the penalty is 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%).