Overseas Cash Gift May Trigger Tax Obligation to US Recipient

A Cash Gift from Abroad May Trigger a Tax Obligation 

The international tax and reporting rules can be very complicated. This is especially true in a situation in which a US person receives a cash gift. In general, when a non-resident alien provides a gift to a US person, that gift is not taxable to the US person recipient. Rather, the US person recipient may have to report the gift on Form 3520, but unless the foreign person is also a US person who just happens to live overseas, there are no 709 requirements for the person giving the gift. But, a cash gift from abroad can trigger a tux obligation to the recipient in unlimited situations. One of the most common situations is when a person is a covered expatriate and then wants to give a gift to a US person. In this type of situation, it is the recipient and not the person giving the gift who is subject to a gift tax. Let’s take a look at how this would work. 

Cash Gift from Abroad – Covered Expatriate

Jennifer is a covered expatriate. She was a long-term lawful permanent resident who remained a permanent resident for 15 years before formally relinquishing her green card. She relocated overseas back to her home country. She is now living a leisurely life of retirement. Jennifer’s children are still US persons who reside in the United States. They recently finished their studies and are now getting ready to start families. Therefore, she gifts each one of them $1 million.

In general, when a US person receives a gift from a foreign person it is reportable but not taxable. But, since Jennifer is a Covered Expatriate, in accordance with the gifting rules from covered expatriates to US persons, the gift is taxable. Moreover, it is the recipient of the gift who has to pay the tax and not the person giving the gift — although if foreign gift taxes were paid, they may be applied as a credit against gift tax due in the United States. Technically, form 708 is supposed to be filed for the CE gift — but that Form has not been published yet.

Non-Grantor Trust Distribution

Another common situation in which a US person they have to pay a gift tax is the indirect situation in which a US person beneficiary receives a distribution from a non-grantor trust. Unless the distribution is a pure gift, chances are the distribution is taxable as income. That is why it is very important for a US person beneficiary who receives a foreign non-grantor trust distribution to receive a foreign non-grantor trust distribution statement identifying the source of the distribution, whether it is from current year income come etc. In addition, with foreign trust distributions, there are other complications US beneficiaries have to be at cognizant of, such as the throwback tax rule and DNI vs UNI.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.