Gifts from foreign persons to US persons may be reportable to the IRS and may be taxable. However, just because something is reportable does not mean it is automatically taxable. First, there are important monetary thresholds to keep in mind. A US person who receives – and treats as a gift – more than $100,000 from a nonresident alien individual or a foreign estate/trust must report that gift on an IRS Form 3520. If a taxpayer receives more than $16,388 from a Foreign Corporation or Foreign Partnership, he or she must again report the gift on an IRS Form 3520. But while reportable, foreign gifts do not become “taxable” unless the gift is also “income producing” – for example, a gift of a fixed deposit account (similar to CD’s in the US). In that instance, it is not the gift that is taxable (it is only reportable), but the income derived from the gift is taxable. In the eyes of the IRS, income is income from any source derived (even foreign sources), unless an exception applies.
Failure to report foreign gifts may result in severe penalties. There are defenses to offshore penalties however, like Reasonable Cause. But a taxpayer must be very careful in his or her IRS negotiations – inadvertently making an admission that is construed as a “willful” act or omission has serious consequences, like criminal charges being filed. It is advisable that a taxpayer seek professional assistance when dealing with the reporting of foreign gifts, determining their taxability and asserting any defenses against offshore penalties.