There are many misconceptions about gifts. In “Gift Tax? Hakuna Matata,” I explained why even moderately wealthy folks do not need to worry about the $14,000 per person per person limit on annual gifts. However there are gift reporting requirements that must be met for large gifts, particularly from foreign donors.
It is common knowledge that banks report all cash transactions that exceed $10,000. If you try to deposit more than that amount, or try to buy an item with more than $10,000, you will be required to fill out IRS Form 8300. This is an “information return,” not a tax return. The government does not tax cash transactions, but it has an understandable interest in knowing who is transacting substantial business in cash.
What is less well known is that bank officers are encouraged to report a transaction of any amount that “alerts their suspicions.” Therefore, repeated cash transactions below the threshold may still be reported to the IRS. Money transfer businesses may report transfers between countries as small as $1,000.
A U.S. resident who receives a transfer of more than $100,000 from a foreign individual, or $15,601 or more from a foreign company, must report it on IRS Form 3520 — Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Again, this is an information return, not a tax return, because gifts are not subject to income tax.
The recipient of the transfer is responsible for reporting the amount received during the current tax year with your annual tax filing. The penalty for failing to file Form 3520 on time is $10,000 or more. If more than $10,000 the penalty is 35% of the gross value of the distributions received from a foreign trust, unless it was your money to begin with. Even if it is your money coming from outside the country, the penalty is 5% of the gross value. There is also a 5% penalty for failure to provide correct information.
Even an unintentional mistake can be expensive when receiving a large transfer from a foreign payer. Talk to the financial institution or money transfer service ahead of time to determine and provide the proper documentation. At a minimum, a transferee must provide government-issued photo identification and proof of your address – it can be almost as arduous as voting in Texas.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2018 John B. Payne, Attorney