If I Don’t File A U.S. Tax Return, Do I Report Foreign Inheritance

If I Don’t File A US Tax Return, Do I Report Foreign Inheritance?

Who Reports Foreign Inheritance to the IRS?

One of the most complicated aspects of having to report international transactions, assets, investments, etcetera is that the IRS requires taxpayers to do it even when there is no tax return filing requirement. Even when a U.S. Taxpayer may have no income — and thus no reason to file a U.S. tax return — they may still required to file certain international information reporting forms to disclose the information to the IRS. One of the most common forms that a taxpayer may have to file is the IRS Form 3520. This form is used to report foreign gifts, inheritances, and trusts. Especially for taxpayers who are not initially from the United States but are considered a U.S. person for tax purposes because they have a green card or they meet the substantial presence test, it is very overwhelming to try to understand how the United States tax system works. Let’s work through a basic example of how a person ends up getting hit with a major penalty for not reporting a foreign gift or inheritance.

David is a Visa Holder

David is neither a U.S. citizen nor a lawful permanent resident. He has been traveling to the United States over the past few years on a B1/B2 visa, and based on the number of days has remained in the United States for the past three years, he is considered to be a U.S. person for tax purposes under the Substantial Presence Test

David Applied for LPR so No CCE

David does not qualify for any Form 8843 exceptions to substantial presence and because he already applied for a green card, he no longer qualifies for the closer connection exception to the substantial presence test.

David Received a Foreign Inheritance

Last year, David’s sweet Peruvian grandma passed away and left him $900,000. His grandma knew that David wanted to start his life in the United States so she left him the money so he could purchase his dream home. Other than this $900,000 foreign inheritance that David received, David does not have any income. Therefore, David is not required to file a tax return.

David Must Still File Form 3520

Here is where it gets complicated. Even though David may technically not have to file a 1040 tax return as an individual, because he has no income to report, David does have to file Form 3520 to report the foreign inheritance. Just because David does not have to file a tax return does not mean that he can avoid filing the necessary international information reporting forms. Some forms are only required if a taxpayer has to file a tax return, such as Form 8938. Other forms are required even if the taxpayer does not have to file a tax return, such as Form 3520 and Form 5471.

Penalties and Abatement

Since David did not file Form 3520, when he does file the form he may become subject to penalties upwards of 25% value of the gift. The 25% value represents a 5% penalty per month that the filing is late up to a total amount of 25%. That means David may be looking at a $225,000 penalty for a gift he received from his grandmother even though he had zero unreported income. Noting, that even though David did not file the form timely, even if he is penalized he may qualify for various abatement or penalty avoidance amnesty programs.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their 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.