The receipt of a gift or inheritance generally is not taxable income to the recipient. However, if you are a U.S. citizen or income tax resident and the value of aggregate gifts/inheritance you receive from a nonresident during any tax year exceeds a certain threshold, you must report each gift/inheritance to the IRS.
A nonresident is any person other than a citizen or income tax resident of the United States, and includes a foreign estate. Gifts from nonresidents do not include direct payments for qualified tuition or medical expenses made on behalf of the recipient.
For purposes of determining whether the receipt of a gift from a nonresident is reportable, different thresholds are applied for gifts received from individuals and foreign estates than for gifts from foreign partnerships and foreign corporations. A U.S. person is required to report the receipt of gifts from a nonresident or foreign estate only if the total amount of gifts from that nonresident or foreign estate is more than $100,000 during the tax year. Once the $100,000 threshold has been surpassed, the recipient must separately identify each gift/inheritance that is more than $5,000.
A U.S. person must report the receipt of gifts from foreign corporations and foreign partnerships if the total amount of gifts from all such entities during the year is more than $15,102 (for 2013). Note that this threshold amount is subject to cost-of-living adjustments. Once the threshold has been surpassed, the recipient must separately identify all gifts from foreign corporations and partnerships, including the name of the donor.
If you fall within these reporting rules, you are required to file Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” The form is due on the date that your income tax return is due, including extensions. The form should not be attached to your income tax return, but must be sent separately to another IRS Service Center.
The penalty for not reporting a foreign gift/inheritance that must be reported is 5 percent of the amount of the gift for each month the failure to report continues, up to a maximum of 25 percent. The penalty will not be imposed if the failure to file is shown to be due to reasonable cause and not due to willful neglect.
Depending on the actual method of transfer, other foreign information reporting requirements may also apply. For example, if you receive the foreign gift/inheritance by way of a foreign financial account, you may need to report that account on a Form TD F 90-22.1 (“Foreign Bank Account Report” or “FBAR”). This form is required when a U.S. person has an interest in foreign financial accounts in excess of $10,000 in aggregate. A Form 8938, “Report of Specified Foreign Financial Assets,” may also be required to report a foreign gift or inheritance. Additionally, if the “gift” received is a distribution from a foreign trust, then additional reporting requirements may apply, and you may owe significant tax on the distribution received (depending on the nature of the trust and distribution).
In addition to the above potential requirements related to receiving a foreign gift or inheritance, the donor or decedent may also have to file U.S. gift or estate tax returns (and may owe U.S. gift or estate tax) depending on the size and nature of the gift or inheritance.