Foreign Gifts | When Do You Have To Report Them?

• Published date: 22 March 2022
• Subject Matter: Tax, Inheritance Tax, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Mr TL Fahring

Foreign Gifts and IRS Reporting

U.S. persons who receive gifts or bequests from foreign persons beware-these gifts or bequests may need to be reported to the Internal Revenue Service ("IRS"). The consequences for failing to do so can be costly.

What Are the General Requirements to Report Foreign Gifts?

For purposes of federal income tax, gross income generally does not include the value of property acquired by gift, bequest, devise, or inheritance.¹ However, a U.S. person who receives foreign gifts that exceed certain threshold amounts during the taxable year must report the gifts on a Form 3520.²

Who's a U.S. Person?

A "U.S. person" includes 1) a U.S. citizen or resident, 2) a domestic partnership 3) a partnership; 4) an estate other than a foreign estate; and 5) a trust if a U.S. court can exercise primary supervision over the trusts administration and U.S. persons have authority to control all substantial decisions of the trust.³ A "foreign estate" is an estate whose income is foreign source and not effectively connected to the conduct of a U.S. trade or business.⁴

What's a Foreign Gift?

Generally, a gift is a transfer of money or property that proceeds from a "'detached and disinterested generosity'" and "'out of affection, respect, admiration, charity or like impulses.'"⁵

A "foreign gift" is "any amount received from a person other than a U.S. person which the recipient treats as a gift or bequest."⁶ However, the term doesn't include any amount paid on behalf of an individual as tuition to an educational organization for the education or training of the individual or to any person who provides medical care with respect to the individual.⁷ The terms also doesn't include any amount that a U.S. person is required to report as a distribution from a foreign trust (probably because these distributions generally would have to be reported on a Form 3520 anyway).⁸

What Foreign Gifts Need To Be Reported?

The reporting requirement differs based on whether the donor of the gifts is a nonresident alien individual, foreign estate, foreign corporation, or foreign partnership.⁹ If the donor of the gifts is a nonresident alien individual or foreign estate and the aggregate value of the gifts that the U.S. person receives from that nonresident alien individual or foreign estate during the taxable year exceeds $100,000, then the U.S. person must separately report each gift exceeding $5,000 that the U.S. person received from that nonresident alien individual or foreign...