By Tom Andrews, CPA
Now that Christmas is over the topic of foreign and nonresident gifts become a frequently discussed topic. Many yacht crewmembers have friends, family, spouses etc. who 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 – $15,601 for gifts made during a tax year beginning in 2015.
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.
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.