by Tom Andrews, CPA
As mortgage interest rates have increased crewmembers looking to purchase homes have made larger down payments. This can be particularly complicated when the purchaser has access to funds from offshore. Transferring funds from an offshore bank account is a common occurrence for maritime professionals. Many 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.
Receiving funds from an offshore account for the purpose of purchasing a home may give rise to additional reporting requirements on your US income tax return. While you should already be disclosing the ownership or signature authority on an offshore bank account on Form 114 the receipt of a foreign gift, bequest or transfer may require the filing of a form 3520 as well.
In general, a foreign gift or bequest is any amount received from a person other than a U.S. person (a foreign person) that the recipient treats as a gift or bequest and excludes from gross income. A foreign gift does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person. 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.
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 – 5 percent of the gift per month or part of a month, up to a maximum of 25 percent. 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.
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.