Can the IRS “Look Through” an Intermediary in Foreign Gift Reporting?
If you're a U.S. taxpayer, receiving a financial gift from abroad can have more tax consequences than you might realize. Whether it's a parent sending funds from overseas or an inheritance from a foreign relative, the IRS keeps a close eye on these transactions. These cross-border transfers can be perfectly legitimate—but the reporting rules are nuanced, and missing a required filing can lead to steep penalties. Things get especially tricky when money passes through another person instead of moving directly from the foreign donor to the U.S. recipient.
This “middle person” may seem harmless, but for reporting purposes, it can make all the difference. Understanding when and how the IRS “looks through” intermediaries is key to staying compliant—and that starts with knowing what actually qualifies as a foreign gift.
What Counts as a Foreign Gift?
A foreign gift is broadly defined as money or property received from a non-U.S. person, such as an individual who isn't a U.S. citizen or resident, or a foreign corporation or partnership.
It's important to note that not all foreign transfers count as gifts under IRS rules. For example, payments made directly for qualified tuition or medical expenses are excluded from gift reporting. Similarly, distributions from a foreign trust are not treated as gifts—they’re considered trust distributions and are reported separately under Sections 6048 and 679 on a different portion of Form 3520.
However, any direct or indirect transfer that benefits a U.S. person from a foreign source generally triggers foreign gift reporting obligations, even when no tax is due.
In short, the nature of the transfer—not just its label—determines whether it’s treated as a foreign gift or a separate kind of reportable event. That distinction becomes especially important when another person is involved in moving the funds.
The Intermediary Question
This is where tax law meets human complexity—because relationships and real-life transactions rarely follow straight lines. The IRS wants to understand who the intermediary represents in the transaction, and there are two main possibilities.
First, there's the agent of the donor. If the intermediary is acting on behalf of the foreign person, the IRS will treat the transfer as a direct gift from the foreign donor to the U.S. recipient. For example, if a foreign parent wires money to a cousin in the U.S. who then forwards it to their child, the IRS considers the parent the true donor.
Second, there's the agent of the recipient. If the intermediary is acting for the U.S. recipient, then the gift is considered received the moment the intermediary obtains the funds, even before they pass them along.
Understanding which scenario applies is crucial, because it determines who must report the gift, when, and on what form.
Why the IRS Cares (Substance Over Form)
The IRS applies a "substance over form" principle, meaning it looks beyond the paperwork to determine what actually happened. This prevents taxpayers from using intermediaries to disguise or delay reportable transactions.
The agency's goal is simple, and it's to ensure transparency. If a U.S. person is effectively receiving a foreign gift, the IRS wants that transaction disclosed, regardless of how many hands the money passes through.
Here's an example. A foreign parent instructs a cousin to "hold" $200,000 and later give it to their U.S. child. Even if the cousin deposits the money in their own account first, the IRS may see through this arrangement and treat it as a direct foreign gift to the U.S. child, which must be reported.
In other words, the IRS focuses on intent and control, not convenience. If money effectively benefits a U.S. person, they expect disclosure—regardless of the path the funds took to get there.
Reporting and Compliance
So how does this translate into actual reporting obligations? Under Section 6039F, U.S. individuals must report foreign gifts if the total value from foreign individuals or estates exceeds $100,000 in a calendar year, or the total from foreign corporations or partnerships exceeds $19,570 (this is the gift tax limit 2025 threshold, and it's adjusted annually for inflation).
These gifts are reported on IRS Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Failure to properly report can result in penalties of up to 25% of the unreported gift amount, even when no tax is owed.
Failure to report can be costly. The IRS can impose penalties of up to 25% of the unreported gift amount—even if no tax is owed. In some cases, penalties apply per year the form is missed, adding up quickly.
Maintaining clear documentation of the transaction, including any intermediary's role, is essential to show good-faith compliance and avoid unnecessary scrutiny.
Practical Takeaways for Families and Individuals
Foreign gifts are common among global families but routing them through intermediaries can easily complicate things. With that in mind, here’s how to stay ahead of potential compliance issues:
Be cautious when gifts cross borders, especially if someone else is involved in transferring funds.
Assume the IRS will look through the transaction to determine the true donor and recipient.
Document intent with written correspondence or transfer records showing who the funds are for to help clarify the relationship.
Consult a tax professional before receiving or sending large foreign gifts, particularly if intermediaries or multiple accounts are involved.
A proactive approach can help avoid costly penalties and ensure your reporting aligns with IRS expectations. Searching "tax lawyer near me" or “tax attorney Washington DC" can help you find the guidance and information you need.
Foreign gifts don’t have to become a compliance headache. With careful planning and clear documentation, U.S. recipients can meet IRS obligations and avoid unnecessary scrutiny.
If you’re considering transferring or receiving money from abroad—especially through an intermediary—contact Kundra & Associates for experienced legal guidance in structuring foreign gifts and navigating complex IRS reporting rules. Our firm serves clients nationwide and internationally from offices in Rockville, Maryland, and Washington, D.C. We provide trusted counsel in international tax law, IRS controversy, and cross-border compliance—so you can move forward with clarity and confidence.