by Brian Mahany
All of the main stream media attention in the offshore tax reporting world has been focussed on OVDI and the looming FATCA reporting for banks. [If you have unreported foreign bank and brokerage accounts and don’t know what OVDI or FATCA is click here and here – you may have some more pressing concerns!] Very few people are talking about foreign gift reporting, however.
Foreign gifts and inheritances may also need to be reported as well. The word “may” appears in italics because theoretically, the person making the gift or leaving you the property should be paying the tax. But Uncle Sam expects you to prove that money from overseas was a gift and not income. That’s where the reporting rules become important.
Like everything else with the IRS, there is a form for foreign gifts, Form 3520 called an Annual Return To Report Transactions With Foreign Trusts And Receipt Of Certain Foreign Gifts. This form can be used by U.S. taxpayers that received a gift or bequest from a foreign person. Fail to file the return and expect penalties and a tax bill to boot.
Penalties for unreported gifts accrue at 5% per month up to a maximum of 25%. More importantly, the penalties begin to accrue when you constructively received the gift, not when you actually received it. If the failure to report was due to an innocent mistake, the IRS may waive some or all the penalty. Things are a bit more tricky, however, if you received an inheritance instead of a gift.
Special rules apply for transfers to Canadian retirement accounts (RRSP’s), monies used for medical treatment and for college tuition, among other things. There also additional forms for offshore trusts and reporting requirements if you put money into an offshore trust. Because the rules are so complex, hiring a CPA or tax attorney well versed in foreign reporting requirements is wise.
The tax lawyers at Mahany & Ertl have helped many taxpayers with foreign reporting requirements. We are the preferred legal services provider to the CPAmerica organization meaning we help both taxpayers and other professionals. If you have a question or concern regarding foreign partnerships, foreign gifts, offshore bank accounts or unreported foreign income, give us a call. All inquiries are protected by the attorney – client privilege and kept in strict confidence. For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California (IRS tax services only). IRS legal services available anywhere in the U.S. and the world.