Contributed by KeriC, FreeTaxUSA Agent, Tax Pro
If you receive a foreign inheritance, you may have to report it to the IRS, even though the inheritance itself is typically not subject to income tax. However, there are specific forms and reporting requirements based on the value of the inheritance and its nature. Here's how to handle it:
Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
Who must file? If you receive an inheritance or gift from a non-U.S. person or estate, you may need to file IRS Form 3520 (Form 3520 Instructions). Specifically, you must file this form if the value of the inheritance is:
- More than $100,000 from a non-U.S. individual or foreign estate.
- More than $16,000 from a foreign corporation or partnership.
What to report? You report the total amount received, who it came from, and other identifying information about the foreign entity or individual.
When to file? Form 3520 is due by the same date as your tax return, including extensions (typically April 15 or October 15 with an extension). However, it’s filed separately from your tax return and isn’t a form supported by our software.
No Income Tax on the Inheritance
While you must report the foreign inheritance on Form 3520, it’s generally not subject to U.S. income tax. However, if the inherited assets generate income (e.g., interest, dividends, rental income), that income is taxable and must be reported on your regular income tax return (Form 1040).
Foreign Bank Accounts (FBAR) and FATCA Reporting
FBAR (FinCEN Form 114): If the inheritance includes foreign bank accounts and the aggregate value of your foreign accounts exceeds $10,000 at any time during the year, you must report these accounts via the FBAR.
FATCA (Form 8938): If the value of your foreign financial assets exceeds certain thresholds, you must report them on Form 8938 as part of the Foreign Account Tax Compliance Act (FATCA).
You may need to attach Form 8938 to your tax return to report your foreign financial assets such as foreign bank accounts or foreign stocks to the IRS if:
- You are unmarried and you owned foreign financial assets of more than $50,000 on the last day of the year or more than $75,000 at any time during the year.
- You are married filing jointly and you owned foreign financial assets of more than $100,000 on the last day of the year or more than $150,000 at any time during the year.
However, if the foreign financial assets are managed by a U.S. payer, such as a U.S. bank, mutual fund or brokerage firm, you don't need to report them since the U.S. payer will have already reported that financial information to the IRS.
Our software will provide additional information and allow you to answer questions to help determine if you need to include Form 8938 with your return by following the menu path: Misc > Income > Foreign Financial Assets.
Penalties for Non-Compliance
Failure to report a foreign inheritance properly can lead to significant penalties. For example, failing to file Form 3520 can result in a penalty of 5% of the total value of the foreign inheritance per month (up to a maximum of 25%).
