Guide To Reporting Foreign Inheritance & Gifts To The IRS

If you are a citizen of the United States or a resident alien and have received inherited foreign property or gifts of money from a foreign national, the Internal Revenue Service (IRS) does not impose taxes on these foreign inheritances. Just keep in mind that you may need to pay inheritance tax on the inherited assets to the foreign nation or depending on your state where inheritance tax may apply.

Also, a U.S. citizen can get unlimited amounts of gifts and inheritance from a spouse who is not a U.S. citizen as these gifts are tax exempted.

In case the donor is other U.S. citizens or resident aliens even when their place of residence is outside the U.S. federal estate tax/gift tax may apply which is payable by the donor and not the recipient.

What Are the IRS Rules for Receiving Foreign Inheritance and Gifts?

Under the IRS Rules, you need to report your foreign inheritance on Form 3520- Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

The main purpose of Form 3520 is to report certain transactions with foreign trusts, ownership of foreign trusts, and receipt of gifts or bequests from foreign persons. The foreign person in this case can be any foreign individual, corporation, trust, or estate that is not a U.S. person.

What Are the Conditions Required for Filing Form 3520?

You must file form 3250 to the IRS if:

• You are responsible for reporting the transactions that happened during the current tax year. The responsible party should include the person who transferred the property to a foreign trust
• You own any portion of the foreign asset of a foreign trust during the current tax year
• You received a monetary distribution directly or indirectly from a foreign trust during the current tax year
• The value of the gifts or bequest  from a non-resident alien or a foreign estate as of 2020 exceeds $100,000
• The value of the gifts received from foreign corporations or foreign partnerships exceeds $16,649 as of the tax year 2020 (the value adjusted annually for inflation)

Form 3520 is considered an informational return rather than a tax return because foreign gifts are generally not subject to income tax. However, failure to fill out Form 3520 when it is required can result in stiff penalties.

When Is the Due Date of Filing Form 3520?

The due date falls on 15th April of the following year after receiving the gift or bequest. For most taxpayers, this is the same time the income tax return (1040) is due.

The IRS has extended the deadline for filing individual 2020 income taxes from April 15 to May 17, 2021.

In case you are living outside of the U.S. and Puerto Rico or are in the military or naval service on duty outside of the U.S. and Puerto Rico, the due date falls on June 15 of the following year after receiving the gift or bequest.

If granted an extension of filing income tax return, the due date will be on October 15, which is the 15th day of the 10th month following the end of your tax year.

What Is Form 3520-A?

Form 3520-A is different from Form 3520 and thus, should not be treated the same way.

Form 3520-A is the annual information return of foreign trust with at least one U.S. owner, owning a certain portion of the foreign asset. This form is generally included when filing Form 3520.

The deadline for filing Form 3520-A falls on the 15th March, which is the 15th day of the 3rd month following the end of your tax year.

Speak to a legal counsel or tax advisor to better understand the process of filing Form 3520-A.

What Are the Penalties for Failing to File Form 3520 and Form 3520-A?

The penalty is equal to the greater of $10,000 or:

• 35% of the gross value of any property transferred to a foreign trust
• 35% of the gross value of the inheritance received from a foreign trust
• 5% of the gross value of the portion of the foreign trust's assets treated as owned by a U.S. person
• Up to 25% of the amount of the foreign gift or bequest for failure to report the receipt of inheritance from a person who is not a U.S. citizen.

Is It Possible to Abate the Penalties?

If you can demonstrate and disclose a valid reason for failure to file Form 3520 on time and that it was not due to willful neglect, the abatement of the penalty is possible.

Filing FinCEN Form 114 or Fbar Form (Foreign Bank Account Report)

If you decide to put your foreign inheritance in a foreign bank account, you may need to file an FBAR or FinCEN Form 114 to the U.S. Department of Treasury by mid-April of each tax year if your account holds more than $10,000.

Failure to file the FBAR form can incur heavy penalties. The penalties are greater than $128,210 or 50% of the account value at the time of the violation of the FBAR reporting rules.

FBAR form is required to file by any U.S. citizen or green card holder with foreign accounts that hold an aggregate of more than $10,000.

You need not file the form if your foreign estate executor or probate account manager transfers your inheritance directly to your US-based bank account.

You can also report to the department if you are carrying more than $10,000 or more in cash into the U.S. from an inheritance.

How to Avoid Double Taxation?

The U.S. has signed the Gift Tax Treaties with many countries. If you have paid taxes to a foreign nation to receive an inheritance from another country, you can declare the payment to avoid double taxation.

Use Form 706-CE to Declare Foreign Inheritance Taxes

706-CE Form (Certificate of Payment of Foreign Death Tax) is for reporting any foreign taxes paid on the inheritance you received from foreign nationals.

We recommend that you always consult a legal counsel or tax advisor when filing the forms to avoid mistakes and complications. The requirements and the process of filing can seem daunting to taxpayers that are new to U.S. taxation.

Also, tax structure can vary from country to country. The foreign trust or person must consult with tax experts in their own country with regards to gift and inheritance laws from their side.