If you are a lawful permanent resident or citizen of the United States with loved ones in another country, you may need, at some point, to transfer money to or receive money from them. If the transfer is for a significant amount, whether all at once or in smaller amounts over a period of time, you will need to be aware of certain reporting and tax requirements. Even if you are not required to pay tax on a transfer, there may be a financial penalty for failing to report it.
As a general rule, "foreign gifts" are defined as money or assets received by a U.S. person from a foreign person, and treated by the recipient as a gift or bequest and not included in gross income. Foreign gifts do not include qualified tuition or medical payments made by a foreign person on behalf of (but not directly to) the U.S. person.
A foreign "person" for purposes of tax law may be a nonresident alien individual, but may also be a corporation, or partnership. The IRS may characterize gifts from a corporation or partnership as income for tax purposes, even if the recipient disagrees.
If you receive a foreign gift and treat it as a gift or bequest rather than ordinary income, you are required to form IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if the gift exceeds certain thresholds. Gifts from non-resident aliens whom you know or should know to be related must be aggregated; they cannot be treated separately to defeat the reporting requirement. Form 3520 is due on the same day as your U.S. income tax return, but it is not filed together with your income tax return.
Gifts from certain individuals known as covered expatriates (former citizens or lawful permanent residents of the United States who have ceased to be citizens or green card holders may be subject to a transfer tax under IRS Section 2801.
If you fail to file Form 3520 when you are required to do so, or file an inaccurate form, you may be subject to a financial penalty of $10,000 dollars or more. In addition to being required Form 3520, you may also be required to file Financial Crimes Enforcement Network (FinCEN) Form 114 (Report of Foreign Bank and Financial Accounts) or be subject to additional penalties. Citizens and all residents of the United States must file a Report of Foreign Bank and Financial Accounts (FBAR) through FinCEN if they have "a financial interest in, or signature authority, over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported." This requirement includes all types of financial accounts, including bank accounts, insurance brokerage accounts, investment accounts, and more.
You may also be required to file IRS form 8938, Statement of Specified Foreign Financial Assets. This form is required of certain individuals, including U.S citizens, resident aliens, and certain non-resident aliens who have an interest in specified foreign financial assets and who meet the reporting threshold. Depending on the marital status of the individual and whether he or she is living in the United States, this threshold may be as low as $50,000.
If you are a U.S. person and transfer funds or other property, directly or indirectly, to a foreign trust, you are also obligated to file IRS Form 3520. Likewise, you must do so if you are a U.S. owner of all or any portion of a foreign trust. Similarly, you must file if you are the executor of the estate of a U.S. person who is deceased and who made a transfer at death to a foreign trust, or owned any portion of the trust prior to death, or whose estate owned any assets contained in a foreign trust.
Independent of these reporting requirements, if you make gifts above a certain amount, you will be liable for U.S. gift tax. The details vary depending on whether you are a domiciliary or a non-domiciliary of the United States, and domicile for gift tax purposes is determined differently than the residence test for income tax purposes. If you are planning a substantial gift to a foreign person, you should consult with a an experienced tax attorney in advance to understand your obligations and minimize your tax burden.
The tax attorneys of Ortiz & Gosalia, PLLC, have post-JD degrees in tax law and offer a range of counsel and representation with regard to U.S. tax law. Our attorneys understand how tax law and immigration law intersect, and the impact of that intersection on our clients. With offices in Redmond, Bellevue and Kirkland, we work with domestic and international clients and offer services throughout the Seattle area and Washington State. If you are concerned about reporting and other tax requirements regarding transfers of assets to or from a foreign person, we invite you to contact us without delay.