Foreign Gifts and Form 3520

by Tom Andrews, CPA

Many yacht crewmembers have friends, family, spouses etc. whom  are nonresidents living outside the United States.  These relationships sometimes give rise to the transferring of assets or funds between residents and nonresidents, such transfers might trigger a tax reporting responsibility with the Internal Revenue Service.

A foreign gift is any amount received from a person other than a U.S. person that you treat as a gift or bequest. If you received more than a certain threshold amount you must furnish certain information to the IRS.

The threshold amount varies with the type of donor. If the gift is from a nonresident alien or a foreign estate, reporting is only required if the total amount of gifts from the nonresident alien or foreign estate is more than $100,000 (plus an inflation adjustment) for the tax year. However, if the gift is from a foreign corporation or foreign partnership, the threshold is much lower – $16,815.

It is important to remember that you must aggregate gifts received from related parties.  For example if you receive a gift from two separate individuals that total 100K and it comes to your attention that these parties are related this gift will be treated as one gift subject to the form 3520 reporting.

Although reporting is only required if you know or have reason to know that the donor is a foreign person, the penalty is severe if the IRS determines that you should have filed a report but did not.  Generally, the initial penalty is equal to the greater of $10,000 or a percentage of the gross value of the trust assets or distribution.   The penalty doesn’t apply to any failure to report a foreign gift if the failure is due to reasonable cause and not willful neglect.

In order to comply with these rules and not be subject to a penalty, Form 3520 must be filed as an attachment to your income tax return by the due date, including extensions. In addition, a copy of the Form 3520 must be sent to the Philadelphia Service Center by the same date.

If you have received, or expect to receive a gift, from an individual who has voluntarily relinquished his or her U.S. citizenship, it is important to consult with a tax attorney or CPA to confirm if that transaction is subject to the reporting requirements for foreign gifts and transfers.  There are special tax rules impose transfer tax on certain gifts from an expatriate.

Also please keep in mind that charter tip income is considered taxable,  sometimes a charter guest will tell the crewmember that the tip is a “gift” and not taxable”.  The IRS will always consider the relationship between the charter guest and the crewmember as one in which a service is being provided there by making the tip 100% reportable income.

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