Anti-Avoidance Rule for Foreign Gifts and Recharacterization (Golding & Golding, Board-Certified)

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Understanding Foreign Gift Anti-Avoidance Rules

One of the biggest concerns that the IRS has when it comes to the reporting of foreign gifts and trusts, is making sure that taxpayers report the information accurately. An issue that has arisen over the years is that taxpayers who may have received a large foreign gift, do not want to report the transfer as a gift -- because they want to avoid having to file Form 3520 and/or they did not file the form in the year that the gift was received and then want to try to avoid the harsh penalties under Internal Revenue Code, Section 6039F. In response to this issue, the IRS proposes anti-avoidance rules to ensure that foreign gifts are accurately reported as foreign gifts and not as loans or other transfers that would not negate the filing of Form 3520 reporting. If the IRS believes that the transfer has all the ‘indicia’ of being a foreign gift, then the IRS will categorize these amounts as foreign gifts, and presumably, if Form 3520 was not filed timely or accurately will then turn around and issue fines and penalties for non-compliance.