Reporting Foreign Inheritances and Gifts
In the United States, those who receive inheritances or gifts are not required to pay Federal inheritance or gift tax. The burden of paying gift tax falls on the gift-giver, and inheritance tax is paid by the estate of the deceased. The above is true no matter where the gift originated, be it the U.S., or anywhere else in the world. However, in certain situations, the IRS requires that certain informational forms be filed, with severe penalties for those who do not file when they are required to do so. Below we examine some of the general reporting requirements and various forms you might be liable to prepare if you have received an inheritance or gift from a foreign person.
Reporting a foreign inheritance or gift to the IRS
Although gifts or inheritances from foreign persons are not subject to federal income tax or an inheritance tax, there are some reporting requirements that have to be made to the IRS if certain conditions exist.
Reporting foreign gifts and bequests on Form 3520
If you are a U.S. person who received foreign gifts of money or other property, you may need to report these gifts on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required. The IRS requires taxpayers to file IRS Form 3520 if they receive:
1. Gifts or inheritances valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or
2. Gifts valued at more than $13,258 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
In addition, when calculating these threshold amounts, you must aggregate gifts from different foreign non-resident aliens and foreign estates if you know (or have reason to know) that those persons are related to each other or one is acting as a nominee or intermediary for the other.
For example, if you receive a gift of $45,000 from foreign individual A and a gift of $65,000 from foreign individual B, and you know that A and B are related; you must aggregate the amounts and complete Form 3520.
The IRS may also re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons.
Form 3520 Instructions
File Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year.
Penalties for Failure to File Form 3520
You may be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest for each month for which failure to report continues. You may also be subject to a penalty if you file IRS Form 3520 but it is incomplete or inaccurate.
Other Reporting That may Be required due to foreign inheritance
FinCEN114: This form is also often referred to as FBAR (Foreign Bank Accounts Report). FBAR is a requirement of any US Citizen or Green Card Holder with financial interest in one or more foreign accounts in which the aggregate total is at least $10K. If you have inherited ownership of or signing authority on a foreign account containing $10K or more, you will be required to file FinCEN114. However, ifyour inheritance is transferred directly to your US-based account from a foreign account in which you have no financial interest, you may not be required to file this form. If you do need to file FBAR, your form must be received by the US Department of Treasury no later than June 30; the postmark date rule that applies to your tax return does not apply to FBAR.
Penalites for not filing FBAR may include: If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply
From 8938 Statement of Specified Foreign Financial Assets: This form needs to be filed if you have foreign interests of $50,000 on the last day of the tax year, or $75,000 or more at any time of the year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad). You are considered to have a foreign interest if you have any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return. Form 8938 is due by the due date, including extension, of your income tax return. The penalties for not filing can be quite severe.
Penalties may include: Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.
Freeman Tax Law Offers Assistance
Federal and state laws change frequently. For current tax or legal advice, an attorney or CPA should be consulted. The information contained in this article is not exhaustive, and is not a substitute for competent legal advice. If you have a question concerning a foreign inheritance or gift that you have received, please contact us. The initial consultation is always free, and of course all communication will be confidential.