Reporting a Foreign Inheritance to the IRS: Which Form to File?

Foreign Inheritance Form 3520 Reporting

When a US Person receives an inheritance from a foreign person, a non-resident alien who has no US tax nor reporting requirement — the main requirement for the US person (not decedent) is to file a Form 3520 to disclose the inheritance. The IRS rules surrounding International tax law are very complicated. This is especially true when it comes to foreign inheritance and international information reporting. That is because with foreign inheritances there are generally two components to international tax: There is the taxation of the income and the reporting of the account or asset. While most foreign inheritances will escape tax, they must still be reported to the U.S. government. Failure to report the money to the U.S. government may result in significant fines and penalties. Here are some of the basic rules for foreign inheritance reporting:

Foreign Inheritance Form 3520

When a person is a foreign person with a foreign estate, the United States does not have any jurisdiction over those assets.  So in the common situation of a US person receiving an inheritance from a foreign person with foreign assets, the U.S. does not have to pay any tax on that money that they inherit. Once the US person owns the foreign inheritance assets, if they start to generate income, then the US person will have to pay tax on the income generated from the assets.

Why?

Because the income was generated by the US person after the US person received the asset.

Stated another way, there is no estate tax due from a US person who receives a foreign inheritance from a foreign person, comprised of foreign assets. But, once the US person begins receiving income from those foreign assets, income tax is due on the earnings. If the foreign person has any U.S. situs in their estate, the U.S. Tax rules may kick in for the estate of the foreign person as to the U.S. assets, depending on the underlying planning.

U.S. Situs

When a foreign person owns U.S. situs (such as land/property), the estate tax rules are different.  If you are the recipient of US real estate from a foreign person as a result of an inheritance, the US portion of the estate may come subject to estate tax.  Unlike general estate and inheritance rules, the tax rules for a foreign person with US real estate or other property are not very forgiving – with a much smaller exemption or exclusion amount.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.