Avoiding Traps When Inheriting Assets from a Foreign Individual

As we age, our family dynamics shift and we often find ourselves in complicated financial positions. In certain circumstances, those we love want to ensure their assets are designated appropriately when they pass away.  In the United States, there are additional reporting responsibilities a US person needs to consider when receiving an inheritance from a foreign person.

If you are a US person (citizen, green card holder, or resident alien) and receive an inheritance from a person who is a citizen and resident of a foreign country you could have additional reporting requirements when you file your US tax returns.

Form 3520: 

The IRS requires US persons to report gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate, or gifts valued at more than $16,649 from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships) on Form 3520 in the year the transaction occurred. The penalty for not filing a Form 3520 accurately or on time to disclose a gift or bequest is substantial.

Form 8938: 

This form is filed with the US tax return and reports specified foreign financial assets to the IRS.  Thresholds for filing vary depending on the facts and circumstances of a situation.  The penalty for not filing is $10,000 per form and the statute of limitations on the entire tax return does not start to run until Form 8938 is filed.

FBAR: 

If you are a US person and you receive an inheritance, but decide to keep the money in a foreign bank account, you may be subject to additional filing requirements under the Bank Secrecy Act (BSA).  A US person with financial interest or signature authority over a financial account outside of the United States that exceeded $10,000 at any time during the calendar year must file a FinCen114 Report of Foreign Bank and Financial Accounts (FBAR).  (Foreign financial account includes a bank account, an interest in a foreign investment account, foreign pension or foreign life insurance, etc.)

FBAR penalties are adjusted each year for inflation and really depend on the facts and circumstances of a situation. Civil penalties for non-willful violations can exceed $10,000 per violation, as adjusted for inflation. For willful violations, civil penalties can range up to the greater of $100,000 as adjusted for inflation or 50% of the amount in the account at the time of the violation.  Under the latest inflation adjustments, and for penalties assessed after February 19, 2020, the maximum FBAR penalty for a non-willful failure to report a foreign financial account increases to $13,481. The penalty range for a willful failure to report a foreign financial account now begins at $134,806.

The forms noted above are not an all-encompassing list as the reporting requirements are driven by the specific facts and circumstances of a situation.  Depending on what was actually inherited, there could be other forms and reporting analysis necessary beyond what is listed here.  If you find yourself in this situation, please contact the AZ International Tax Team.

This article was written by Dana Cade, CPA and Shareholder in our Helena office.

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