One of the areas of inquiry that is certain to receive increased attention by the IRS and Department of Justice (DOJ) is the claim that the funds in offshore accounts were the result of a “gift”. The proper documentation of gifts is essential. What does proper reporting mean? First a quick summary of the reporting rules.
In the case of a “gift” from a non-U.S. person to a U.S. taxpayer if the gift totals $100,000 of more (in the aggregate) in a single calendar year a Report of Foreign Gift, Devise or Bequest (IRS FORM 3520) must be filed. The failure to timely file the form can result in penalties up to 25% of the gift. According to a report just issued by the Congressional Research Service:
“Nonresident aliens are subject to the federal gift tax only on gifts of their interest in U.S. real estate and tangible personal property situated in the United States. Generally, gifts of intangible property, regardless of the location of the property, made by a nonresident alien are not subject to the federal gift tax”
The problem of documenting the gift is of paramount importance in cases where a U.S. taxpayer has signature authority or control over a foreign financial account which has not been properly reported on an FBAR. In those cases where a U.S. taxpayer had an obligation to timely file an FBAR and did not, those taxpayers now have a choice of using the Streamline Procedures or entering the 2014 Offshore Voluntary Disclosure Program.
In order to use the Streamline Procedure the taxpayer must certify that there conduct was non-willful. In some cases the taxpayer may claim that the source of fund was a gift. A carefully prepared timely written gift letter is essential. But even thought a gift tax return may not be necessary, it may be a god idea to file a Form 709 and disclose the non-taxable gift in order to preserve the claim of non-willful conduct.
Whether a true transfer has occurred or not may still be the subject of examination, but documenting the source of funds, in a careful and objective fashion will aid in obtaining a positive outcome with the IRS and likely avoid DOJ involvement.