If you have recently inherited assets from a foreign benefactor, you may wonder if you will have to report it to the IRS for taxation. In most cases, you won’t have to pay taxes if the money or asset is from a non-US citizen who lives abroad; however, you may still be required to report the inheritance. Each case presents its own unique circumstances, but some of the most common scenarios are listed below.
Inheritance of $10,000 or more in a foreign bank account
You will need to report an inheritance of $10,000 or more if you keep that money in a foreign bank account. This condition also applies if the combination of the money in one or more foreign accounts exceeds $10,000. You can report this by filing a Report of Foreign Bank and Financial Accounts or FBAR. The IRS created FBAR to enable the reporting of foreign bank accounts to prevent hidden funds that are illegally unreported. These funds are not taxed by the IRS, and the FBAR is informational only.
Inheritance over $100,000
If you receive an inheritance from a foreign person or their estate that is over $100,000, you will need to report it to the IRS. You can do this along with your regular individual tax return by completing IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form should only include any sums received within that year.
If your foreign inheritance is placed in a trust, IRS Form 3520-A: Annual Information Return of Foreign Trust with a US Owner must be filed by the trust. If the trust fails to file IRS Form 3520-A as required, it is still your responsibility to make sure that the inheritance is reported by submitting both Form 3520 and 3520-A with your federal tax return.
Offshore assets worth over $200,000
If your total offshore assets are valued over $200,000, or a similar threshold that depends on your filing status, you will need to file Form 8938: Statement of Specified Foreign Financial Assets. Form 8938 must be filed along with your personal tax return. Failure to do so can result in hefty fines of $10,000 after 90 days. Those fines increase by $10,000 increments with each thirty-day period that the form has not been filed.