As mortgage interest rates have increased, crewmembers looking to purchase homes have made larger down payments. This can be particularly complicated when the purchaser has access to funds from offshore. Transferring funds from an offshore bank account is a common occurrence for maritime professionals. Many crew have friends, family, spouses, etc. who are nonresidents living outside the United States. These relationships sometimes give rise to the transferring of assets or funds between residents and nonresidents, but such transfers might trigger a tax reporting responsibility with the Internal Revenue Service (IRS).
Receiving funds from an offshore account for the purpose of purchasing a home may give rise to additional reporting requirements on your U.S. income tax return. While you should already be disclosing the ownership or signature authority on an offshore bank account on Form 114, the receipt of a foreign gift, bequest, or transfer may require the filing of a Form 3520 as well.
In general, a foreign gift or bequest is any amount received from a person other than a U.S. person (a foreign person) that the recipient treats as a gift or bequest and excludes from gross income. A foreign gift does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person. The threshold amount varies with the type of donor. If the gift is from a nonresident alien or a foreign estate, reporting is only required if the total amount of gifts from the nonresident alien or foreign estate is more than $100,000 (plus an inflation adjustment) for the tax year.
It is important to remember that you must aggregate gifts received from related parties. For example, if you receive a gift from two separate individuals that total $100,000 and it comes to your attention that these parties are related, this gift will be treated as one gift subject to the Form 3520 reporting.
Although reporting is only required if you know or have reason to know that the donor is a foreign person, the penalty is severe if the IRS determines that you should have filed a report but did not — five percent of the gift per month or part of a month, up to a maximum of 25 percent. The penalty doesn’t apply to any failure to report a foreign gift if the failure is due to reasonable cause and not willful neglect.
If you have received, or expect to receive, a gift from an individual who has voluntarily relinquished their U.S. citizenship, it is important to consult with a tax attorney or CPA to confirm if that transaction is subject to the reporting requirements for foreign gifts and transfers. There are special tax rules that impose transfer tax on certain gifts from an expatriate.
This article was originally published in the June 2023 issue of Dockwalk.