If you happen to have family members who are nationals of a foreign nation, there is a possibility that you might receive an inheritance from them at some point during your lifetime. You might question whether or not you will be required to pay taxes on an inheritance that you receive from a foreign relative.
If you receive an inheritance from relatives outside the United States, you do not have to pay taxes on it in most cases. The responsibility of paying the tax lies on the person who provided the inheritance. However, it is mandatory to report the gift or inheritance to the IRS if the amount you receive is above a certain threshold.
For your free case evaluation, call our international inheritance tax attorneys at McCormick Tax Law at (215) 630-0861.
Is There a Tax on International Inheritances?
Inheriting assets from a non-U.S. citizen living abroad usually does not entail any tax payments. However, you might need to inform the IRS of the inheritance and pay a foreign inheritance tax if the assets were acquired overseas.
If a non-U.S. citizen leaves an inheritance to a U.S. citizen or resident alien, the IRS generally does not impose any taxes on either the recipient or the deceased’s estate. This holds true unless the assets left behind are considered “U.S. situs.” U.S. situs assets are tangible and real properties located within the United States, usually real estate. For instance, if a non-US person bequeaths a house in California to a US citizen, that house is a US situs asset, and it is subject to a tax of about 40% of its value.
However, if any assets do not qualify as U.S. situs, no federal inheritance tax applies. But you might need to pay state taxes on those assets, depending on your circumstances and the state you reside in. Our international tax fraud attorneys can help you determine what is owed from your gift if anything. Keep in mind that this applies solely to any foreign inheritance tax owed. While taxes might not be levied, the IRS does require you to report an international inheritance in certain cases.
Do I Have to Report an International Inheritance to the IRS?
Even if you are not liable for foreign inheritance taxes, it is important to note that you might still need to report the inheritance. In the event that you receive a gift or inheritance with a value greater than $100,000 from a non-US individual or their estate, you are required to file IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This must be done simultaneously with your individual income tax return, which, for most taxpayers, falls on April 18th of each year.
This $100,000 threshold can include multiple sums received within a single year. For instance, if you receive a gift with a value of $30,000 from a non-US individual and, during the same year, a separate non-US individual leaves you an inheritance of $80,000, then you would need to report both amounts through Form 3520 since the total amount of $110,000 exceeds the $100,000 threshold.
The good news is that Form 3520 is an informational return rather than a tax return. You are simply required to report the gift or inheritance and are not required to pay taxes on it. However, failure to file Form 3520 accurately or on time might result in a fine of up to 35% of the gross value of the gift, inheritance, or both.
Can an International Inheritance Be Placed in a Trust?
If you have received an inheritance and decided to store the money in one or more foreign bank accounts, it is important to note that if the total amount of money in those accounts exceeds $10,000, you will need to file a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114.
Like the reporting requirement above, this is simply an informational return that does not create a tax liability. You also do not have to file this form along with your individual income tax return. Instead, the form must be filed electronically through the FinCEN BSA E-Filing System.
The deadline for filing this form is April 18 of each year. However, if you miss the deadline, it will automatically extend to October 16 without filing a request for an extension.
Are There Penalties for Not Reporting an International Inheritance to the IRS?
Failing to file an information return for an international inheritance on time or providing incomplete or incorrect information on the form can have serious consequences. The IRS can determine the income tax implications of receiving a foreign gift or bequest.
Additionally, you might be subjected to a penalty of up to five percent of the value of the inheritance for every month in which it goes unreported. However, the maximum penalty cannot exceed 25 percent of the gift. It is crucial to ensure that all required information is provided accurately and on time to avoid these consequences.
What Should I Do if I Failed to Report an International Inheritance?
If an individual fails to report their taxes without intention, they can use Streamlined Procedures to successfully submit their taxes. However, if they intentionally fail to report, they must use the IRS Voluntary Disclosure Program. If a taxpayer who intentionally fails to report submits a false narrative through Streamlined Procedures and is caught, they might face significant fines and penalties.
Streamlined Procedures
Taxpayers who use the streamlined filing procedures have three main obligations. Firstly, they must file their original or amended tax returns. Secondly, they should file all necessary informational returns and reporting forms, such as FBAR and FATCA Form 8938. Lastly, they must pay all the taxes due along with any penalties. Under the IRS Streamlined Procedures, taxpayers can file three years of amended or original tax returns and submit international information returns, such as the FBAR.
Voluntary Disclosure Program
Voluntary disclosure is a truthful, prompt, and comprehensive act of sharing your tax information with the IRS through designated channels. It involves working with the IRS to determine your accurate tax liability and making sincere efforts to pay the full amount of tax, interest, and any relevant penalties you owe.
To ensure timely disclosure, it is important to provide the necessary information to the IRS before they begin a civil examination or criminal investigation. The information should be given directly to the IRS by you and not by a third party, such as an informant or another governmental agency. If the IRS receives information related to your noncompliance from a criminal enforcement action, such as a search warrant or grand jury subpoena, it is also considered timely disclosure.
Our International Inheritance Tax Attorneys Can Help
For a free review of your case with our international inheritance tax lawyers, call McCormick Tax Law today at (215) 630-0861.