Do I Need to Report Foreign Inheritance to the IRS?

For a U.S. person, an inheritance from a foreign individual is not subject to U.S. income tax. This often leads to the misconception that no action is required, but the Internal Revenue Service (IRS) has mandatory reporting rules for foreign financial assets. The focus is on information reporting, not taxation, and failing to disclose the receipt of these assets can lead to significant penalties.

Determining if You Need to Report

A reporting obligation is triggered if the total value of assets you receive from a foreign estate or a nonresident alien individual exceeds $100,000 during the tax year. This is the aggregate value of all property received from that single source within the year, not a per-item calculation.

The valuation must be based on the fair market value of the property at the time you receive it. Fair market value is the price an asset would sell for on the open market and applies to all types of assets, including cash, stocks, real estate, or personal property.

Required Information and Reporting Forms

Depending on the assets inherited, you may need to file one or more of the following forms. Each serves a different purpose and is triggered by different circumstances.

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

This form is used to report the event of receiving the inheritance. If the total value of your inheritance from a nonresident alien or foreign estate exceeds the $100,000 threshold, you must file Form 3520. You will need to provide the date you received the inheritance, a description of each property, its fair market value on the date of receipt, and the name and address of the decedent.

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

If your inheritance includes foreign financial accounts that you now own or have signature authority over, you may have an ongoing reporting requirement. This is filed with the Financial Crimes Enforcement Network (FinCEN). An FBAR filing is required if the combined total of all your foreign financial accounts exceeds $10,000 at any point during the calendar year. For each reportable account, you will need the name of the financial institution, its address, the account number, and the maximum value of the account during the year, converted to U.S. dollars.

Form 8938, Statement of Specified Foreign Financial Assets

A reporting requirement may apply through Form 8938, which is filed with your annual income tax return. This form has different and higher reporting thresholds than the FBAR. For a single individual living in the U.S., the filing requirement starts if the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. These thresholds are higher for those married filing jointly. “Specified foreign financial assets” includes financial accounts, stock in a foreign corporation, and interests in a foreign partnership.

The Filing Process for Each Form

The submission process and deadlines are distinct for each form. For Form 3520, the filing deadline is the same as your federal income tax return and is extended if you file an extension. This form must be filed separately from your Form 1040 tax return and mailed to a specific IRS service center address listed in the form’s instructions.

The FBAR, or FinCEN Form 114, must be submitted electronically through the BSA E-Filing System. The deadline for the FBAR is April 15, but filers are granted an automatic extension to October 15. No special request is needed to receive this extension.

Form 8938 is attached directly to your annual Form 1040 income tax return. It becomes part of your overall tax filing package that is either mailed or electronically filed. Its due date is the same as your income tax return, including any extensions.

Penalties for Non-Compliance

Failing to file these informational returns can result in significant financial penalties, even when no tax is owed on the inheritance. The penalty structures differ for each form. Failure to file a complete and accurate Form 3520 on time can result in a penalty of 5% of the value of the inheritance for each month the form is late, up to a maximum of 25% of the total value.

FBAR penalties are separated into two categories based on intent. For a non-willful failure to file, the penalty can be up to $16,536 per unfiled report. If the failure to file is found to be willful, the penalty is the greater of $165,353 or 50% of the balance in the account at the time of the violation. These penalty amounts are adjusted annually for inflation.

The penalty for failing to file Form 8938 starts with a $10,000 penalty for failure to disclose. If you receive a notice from the IRS about the failure and continue to not file the form, an additional penalty of up to $50,000 can be imposed.