By Barbara Ruiz-Gonzalez - Zumpano, Patricios & Winker, P.A.
South Florida is an international gateway, with busy ports and airports and a flourishing international business community. As a result, non-U.S. citizens from around the world relocate to this area on a regular basis for both business and pleasure. Many of these individuals decide to stay in the United States and become citizens. These individuals often send money to, and receive money from, individuals and entities in the countries they came from. What many U.S. citizens don’t realize is that such activities may raise reporting requirements with the Internal Revenue Service (IRS). Specifically, when a U.S. citizen receives money or property from a foreign person or a foreign entity, or transfers money or property to, or receive money or property from, a foreign trust, there may be IRS reporting implications.Gifts From Foreign Individuals or Entities
If a U.S. person receives a gift of money or property from a foreign individual or entity, those gifts need to be reported to the IRS on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. IRS Form 3520 is an information return, not a tax return, because such foreign gifts received by a U.S. person are generally not subject to income tax. There are, however, significant penalties for failure to file Form 3520 when it is required, as outlined more fully below.
If a U.S. person receives a gift or a bequest valued at more than $100,000 from a nonresident alien individual or foreign estate; or a gift valued at more than $14,139 (indexed for inflation) from foreign corporations or foreign partnerships, then that person will be required to file a Form 3520.
In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A “foreign person” is a nonresident alien individual or foreign corporation, partnership or estate.
It is important to note that there are a number of significant exceptions to the reporting requirement, including tuition or medical payments made on behalf of the U.S. person. These amounts are generally not included in the total amount when determining if a Form 3520 must be filed.
Distributions From Foreign Trusts
In addition to gifts, there are other situations in which IRS Form 3520 is required to be filed with the IRS, including transfers to and from foreign trusts. It is important to note that the filing requirement is triggered by both a transfer of money or property to a foreign trust and the receipt, directly or indirectly, of any distributions from a foreign trust, then IRS Form 3520 must be timely filed.
Filing Requirements
IRS Form 3520 is due on the same date as for filing the federal income tax return, including any extensions. However, it is sent in separately from the federal income tax return.
A penalty generally applies if Form 3520 is not filed timely or if the information is incomplete or incorrect. Generally, the penalty is: (i) 35 percent of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the transfer; (ii) 35 percent of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution; or (iii) 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25 percent).
As a result of the reporting requirements and the significant penalties for failing to comply, it is critical that any U.S. citizens that receive money or property from a foreign person or a foreign entity, or transfer money or property to, or receive money or property from, a foreign trust, be aware of and comply with any applicable IRS reporting implications.
By Barbara Ruiz-Gonzalez
Florida Bar Board Certified Specialist in Tax Law
Zumpano, Patricios & Winker, P.A.
312 Minorca Ave.
Coral Gables, FL 33134
305-444-5565
www.zpwlaw.com
South Florida Legal Guide 2011 Edition