The Severe Penalty of Not Reporting Foreign Gifts and Inheritances
When dealing with international taxation there are many complex laws that can cause unexpected tax; however, the most severe and surprising situations often come from informational reports. Receiving foreign gifts or inheritances is a perfect example of this situation.
There is no tax, fee, penalty, or cost when an American receives a gift or inheritance from a foreign person, except for certain U.S. situs property (generally, assets in the U.S. such as real estate). There is also no limit on the amount. The issue comes with the reporting. If these gifts or inheritances are more than $100,000 in one year from an individual or more than $16,649 from a foreign business, this must be reported to the IRS. Many people, knowing this is not taxable, never think there is a form that must be filed, and they really never expect the potential penalty.
The form that must be filed is Form 3520. Form 3520 covers multiple situations, most notably, certain dealings with foreign trusts. The gift and inheritance portion of the form is only page 1 and page 6 of this six-page form. Nevertheless, the penalty for not filing the form is 25% of the value of the gift or inheritance. Furthering this problem, the IRS has been denying reasonable cause filings with Form 3520 on a seemingly indiscriminate basis, forcing nearly all cases to go through the long appeals process. While streamlined filing may be available, for taxpayers in the U.S. this also carries a 5% penalty that could be exorbitant.
Form 3520 and receiving foreign gifts / inheritances is possibly the most severe of the foreign reporting penalties, but it is indicative of the overall scheme. These forms carry high penalties even when no tax is involved. Therefore, it is extremely important that all foreign transactions are reviewed with a professional to ensure compliance. In addition to the high penalty, with FATCA, a more transparent world, and likely eventual use of the gift or inheritance, receiving a foreign gift or inheritance is a situation that cannot be overlooked.