US Tax Implications of Overseas Money Transfers
US Tax Implications of Overseas Large Money Transfers: When a U.S. Person receives an international wire transfer, there are many potential US tax and reporting issues to be aware of. First, the Internal Revenue Service may initiate an international wire transfer audit. In addition, the Foreign Financial Institution (FFI) may report the foreign bank account information to the IRS in accordance with FATCA. Moreover, if the foreign account was under a U.S. person’s name, they may have an individual FBAR (Foreign Bank and Financial Account Reporting) requirement, along with filing Form 8938 — in addition to several other potential International information reporting forms.
Risks of Overseas Bank Wire Transfer to US
Let’s review some of the most common scenarios in involving an international wire transfer of foreign money to the US.
Nonresident Alien Purchase of U.S. Property for U.S. Person Child
Here is a typical example: Michelle is a US person who is on a H-1B visa and starting her first job after completing graduate school. She does not have any credit, and therefore she does not qualify for a mortgage. Her parents are foreign nonresident aliens (NRA) who want to transfer $1 million to Michelle so that Michelle can purchase the home.
Prior to purchase of the home, there are various issues to consider:
- Whose name will be on the real estate title?
- Are the parents gifting the money or the property?
- Will the money first be transferred into a foreign account under Michelle’s name?
In order to avoid both FBAR reporting and potential gift tax consequences for a nonresident alien gifting US property to a US person — the cleanest way to make the transfer is (generally) for the NRA parents to transfer the money directly into the US and into Michelle’s bank account (presuming there are no currency restrictions in the foreign country). Then, Michelle can withdraw her US money from her US account to purchase the home.
This is an important example about why planning is important when wiring money from overseas to the US.
Why is this a Benefit?
First, Michelle does not have any foreign accounts, so she does not have any FBAR or international reporting form requirements.
Second, the foreign parents have not transferred any US property to Michelle, so there is no concern about any immediate gift tax consequence involving nonresident aliens gifting US real estate
Foreign Gift Reporting on Form 3520
Since Michelle is a US person who received a substantially large gift from a foreign person (albeit it her parents), she will have to report the gift on form 3520.
Transferring Your own Foreign money to the U.S.
When a US person transfers money from their own foreign account to the United States, it can be very difficult to avoid any FBAR reporting requirements.
Therefore, if a US person has foreign accounts under their own name, and they wish to transfer that money to the US, they should be sure to stay in compliance with the US reporting rules.
Can’t I Just open Smaller Accounts below $10,000 to Avoid FBAR?
No. When a person intentionally keeps their foreign account (or US account) balances below a certain amount in order to avoid detection by the US government, it is actually a crime referred to as structuring and/or smurfing.
Money Transfers through a U.S. Person Conduit (aka Strawman)
Here’s a common scenario of how wiring money from overseas can be dangerous: Peter is a U.S. person. His parents are very wealthy and have millions of dollars of abroad they would like to invest into the United States. Therefore, the foreign parents transfer the money to the US person (Peter), in order to purchase assets in the United States. Then, Peter transfers title back to the parents, who then provide Peter and his US siblings with authority to manage the properties, sell the properties, and collect the rental income.
In fact, the parents refer to their children as the true owners — even though technically title is in the name of the parents (or with the parents and children)
The IRS may look at this transaction in various different ways
- The IRS make take the position that in reality it is the nonresident aliens who purchased the property in the US and then transferred it to their children — and therefore the subject to immediate gift tax consequences.
- Since the foreign parents are the true owners of the property, the tenants must withhold 30% and submit to the IRS unless certain certificates are obtained and tax returns are filed.
- If Peter received a foreign gift (which he then “re-gifted” back to his parents) he should have filed a Form 3520.
In conclusion, the US government — and the Internal Revenue Service in particular — has significantly increased enforcement a foreign account compliance. With the introduction of FATCA (Form Account Tax Compliance Act) and renewed interesting FBAR Penalties, it is important for taxpayers to remain compliant Enterprise we plan before transferring money from overseas to the US.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and how to handle wiring money from overseas
Contact our firm today for assistance with getting compliant.