Many yacht crewmembers have friends, family, spouses, etc. who are non-residents living outside the United States. These relationships sometimes give rise to the transferring of assets or funds between residents and non-residents; such transfers might trigger a tax reporting responsibility with the IRS.
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 doesn’t include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.
If you received more than a certain threshold amount, you must furnish certain information to the IRS. The threshold amount varies with the type of donor. If the gift is from a non-resident alien or a foreign estate, reporting is only required if the total amount of gifts is more than $100,000 (plus an inflation adjustment) for the tax year. However, if the gift is from a foreign corporation or foreign partnership, the threshold is much lower — $16,649.
It’s 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 these parties are related — this gift will be treated as one gift subject to the Form 3520 reporting.
If you received more than a certain threshold amount, you must furnish certain information to the IRS. The threshold amount varies with the type of donor.
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 didn’t — 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 wilful neglect.
In order to comply with these rules and not be subject to a penalty, Form 3520 must be filed as an attachment to your income tax return by the due date, including extensions. In addition, a copy of the Form 3520 must be sent to the IRS by the same date.
If you’ve received or expect to receive a gift from an individual who has voluntarily relinquished his or her 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 imposed on certain gifts from an expatriate.
Keep in mind that charter-tip income is considered taxable — sometimes a charter guest will tell the crewmember that the tip is a “gift” and “not taxable.” The IRS will likely consider the relationship between the charter guest and the crewmember as one in which a service is being provided, thereby making the tip reportable income.
This article originally ran in the November 2021 issue of Dockwalk.