Foreign Account Inheritance IRS Reporting: FBAR, FATCA, & 8938
Inherited Foreign Bank Account: The foreign account inheritance rules and reporting FBAR & Form 8938 rules are complex, and offshore disclosure rules are hard. In addition, offshore asset filing and disclosure requirements are very onerous — which is what makes the inherited foreign bank account rules complicated.
If a U.S. person inherited Foreign Accounts or Overseas Assets, they have various FBAR Filing and Form 8938 foreign asset reporting requirements. These are disclosed on various international reporting forms.
The most important foreign account requirement is generally the FBAR.
Foreign Account Inheritance on FBAR & FATCA
The Foreign Account Inheritance reporting rules are time-sensitive.
When inheriting foreign accounts, there are many “moving parts.”
The FBAR Filing Requirement kicks when a deceased person leaves a foreign account to another person, who now has ownership, co-ownership, or signature authority over the account. In addition, there are other requirements, such as the Form 8938, PFIC (Passive Foreign Investment Companies), Schedule B, and more, including:
- Form 3520 (Gift)
- Form 3520-A (Foreign Trust)
- Form 5471 (Foreign Corporation)
- Form 8865 (Foreign Partnership)
You Received a Foreign Account Inheritance, Now What?
After Inheriting Foreign Accounts & Offshore Assets, a U.S. person will now have a various reporting requirements. These reporting requirements will vary based on the type of account or asset, and whether it generates any income. While the FBAR carries the stiffest penalty and has a (relatively) low threshold requirement for reporting, the form is not too overwhelming, if you can avoid these common mistakes. Likewise, the Form 5471 can be highly complex, with the IRS estimating the time for completion at around 30 hours.
Foreign Account Inheritance and Offshore Reporting
FBAR is the Foreign Bank and Financial Account Form. The FBAR form must be filed electronically. FBAR Filing can be complicated, depending on the specific FBAR Filing requirements of the filer. For example, if a person has one savings account in Taiwan, the reporting is not that bad. But, if a person has 50 accounts, life insurance, mutual funds, and foreign life insurance — the FBAR filing may be much more complicated. The FBAR filing deadline is relatively forgiving. Unless the IRS and FinCEN change the current FBAR filing deadline rules, then the FBAR is due when your tax returns are due (April or June). But, the FBAR is on automatic extension through October.
Form 8938 for Foreign Account Inheritance
The Form 8938 applies to Foreign Account Inheritance.
The 8938 form was developed in accordance with FATCA. The 8938 was first introduced on the 2011 (1040) tax return. Since then, the form has been revised and updated – but it is essentially the same. It requires the reporting of foreign financial assets to the IRS, along with the income generated from the assets. Unlike other international information reporting returns, the Form 8938 is due to be filed at the same time a U.S. taxpayer’s Tax Return is due. Therefore, for most (U.S. Resident) taxpayers, the form will be included as part of the 1040 submission in either April or October. It is one of the few international tax forms included as part of TurboTax and Tax Act software.
Schedule B for Foreign Account Inheritance
The Schedule B is used to report dividends and interest. BUT, the bottom section, part 7 and 8 are also used to report whether a person has an ownership in or signatory authority over a foreign account. If so, the individual must complete that section of Schedule B. The Schedule B does not have any offshore penalties associated with it, but it may lead to FBAR and/or Form 8938 Penalties.
Other International Reporting Forms
Here are some of the other common international reporting forms:
Form 3520 & Inheriting Foreign Accounts
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 & Inheriting Foreign Accounts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 & Inheriting Foreign Accounts
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
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