The Foreign Inheritance Form 3520 Reporting Rules Explained
Contents
Foreign Inheritance Form 3520 Reporting
When a US Person receives an inheritance from a foreign person, non-resident alien who has no US tax nor reporting requirement — the main requirement for the US person (not decedent) is to file a Form 3520 to disclose the inheritance. The IRS rules surrounding International tax law are very complicated. This is especially true when it comes to foreign inheritance and international information reporting. That is because with foreign inheritances there are generally two components to international tax: There is the taxation of the income and the reporting of the account or asset. While most foreign inheritances will escape tax, they must still be reported to the U.S. government. The failure to report the money to the U.S. government may result in significant fines and penalties. Here are some of the basic rules for foreign inheritance reporting:
Foreign Estates & Form 3520
When a person is a foreign person with a foreign estate, the United States does not have any jurisdiction over those assets. So in the common situation of a US person receiving an inheritance from a foreign person with foreign assets, the U.S. does not have to pay any tax on that money that they inherit. Once the US person owns the foreign inheritance assets, if they start to generate income, then the US person will have to pay tax on the income generated from the assets.
Why?
Because the income was generated to the US person after the US person received the asset.
Stated another way, there is no estate tax due from a US person who receives a foreign inheritance from a foreign person, comprised of foreign assets. But, once the US person begins receiving income from those foreign assets, income tax is due on the earnings. If the foreign person has U.S. situs in their estate, the U.S. Tax rules may kick-in for the estate of the foreign person as to the U.S. assets, depending on the underlying planning.
US Situs
When a foreign person has U.S situs (such as land/property), the estate tax rules are different. If you are the recipient of US real estate from a foreign person as a result of an inheritance, the US portion of the estate maybe come subject to estate tax. Unlike general estate and inheritance rules, the tax rules for a foreign person with US real estate or other property are not very forgiving – with a much smaller exemption or exclusion amount.
Reporting the Foreign Inheritance on Form 3520
The reporting required in receiving a foreign inheritance is the same that is required when receiving a gift from a foreign person.
Why?
Because an inheritance is a gift. And, there is no specific exclusion for not having to report a foreign inheritance gift on form 3520 the same way that a foreign gift from a non-decedent is required.
Learn more about the requirements for reporting foreign gifts.
Form 3520 Inheritance Tax Specialist Team
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including helping clients with late reporting of Forms 3520 and 3520-A.
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