- 1 Did You Inherit Money from Another Country
- 2 Was the Person Giving the Gift a U.S. Person?
- 3 Reporting the Inheritance
- 4 Taxation of the Inheritance
- 5 Pre-Penalty Avoidance
- 6 Late Filing Penalties May be Reduced or Avoided
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Need Help Finding an Experienced Offshore Tax Attorney?
- 10 Golding & Golding: About Our International Tax Law Firm
Did You Inherit Money from Another Country
With the globalization of the US economy and more individuals from across the globe relocating to the United States to reside as a US person, it is important to have a firm understanding of the US tax implications involved when the person receives an inheritance from overseas. The rules are a bit different for overseas inheritances — and the pitfalls are a bit more dangerous due to the international information reporting requirements for people when they receive inheritances from overseas. While a non-resident alien may not be subject to US tax on their estate (other than US situs), the US person recipient of the inheritance may have certain reporting requirements — and possible tax implications. Let’s go through the basics:
Was the Person Giving the Gift a U.S. Person?
The first aspect of the analysis is to determine whether or not the person residing overseas with a US person or a foreign person. If the person was a foreign person, then generally there are not many tax implications unless part of the inheritance involves US property. If instead, it is a US person such as a US Citizen or Lawful Permanent Resident who resides overseas, then there is the concern is that the entire state, including both domestic and foreign property, may be subject to certain tax implications. Certain rules involving domicile may apply — as well as tax treaty laws. The reason why this is so important takes us to the next issue, which is reporting the overseas inheritance — and the reporting rules will vary based on whether or not the decedent was a US Person.
Reporting the Inheritance
If the person residing overseas with the overseas inheritance was a non-US person, then they are considered a non-resident alien for US tax purposes. Thus, the Form 3520 rules will kick in so that a US person who receives an inheritance from overseas will have to report the inheritance on Form 3520 if the threshold reporting requirements are met. If the inheritance is from an individual, then the threshold requirement is if the total value of the inheritance exceeds $100,000 in one year. Therefore, if the overseas estate transfers seven payments of $90,000 each — even though there was no single gift that is above $100,000 — since the combined value of the overseas inheritance received exceeds $100,000, it must be reported. If the US person fails to properly report the inheritance to the IRS and possibly FinCEN — it may result in significant fines and penalties.
Taxation of the Inheritance
From a baseline perspective if the foreign state is owned by a US person who resides overseas, then the entire value of the estate including both domestic and foreign assets is considered for estate tax purposes. As stated another way, if a US person receives an inheritance from an overseas relative but that relative is a US person, then that US person’s estate may have to go through US tax and probate protocols — as US and foreign property is reportable. But, the full exemption should apply —
Conversely, if the overseas estate is owned by a nonresident alien who resides overseas, then there are two components to it. The first component is that a foreign person with foreign assets is generally not required to disclose this information to the US government when they pass away. But, as to the portion of the estate that is considered United States situs, there may be probate issues and estate tax issues as to that component — and the general (harsh) rule is that any value above $60,000 may be taxed. There may be some ways to maneuver around these tax rules if the US person who receives the overseas inheritance for example qualifies for a QDOT.
As with most things in life, it is typically better to try to avoid the penalty in the first place or minimize it at the outset. The Internal Revenue Service offers various offshore amnesty programs to assist taxpayers with getting into compliance. Depending on the taxpayer’s specific facts and circumstances, such as whether they are willful or non-willful and whether or not they have unreported income as well as missed accounts and assets will help determine which program they qualify for.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their Form 3520/3520-A, Form 8938, FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.