How Do I Report Foreign Inheritances to the IRS?

Receiving an inheritance isn’t always simple, especially when it’s from a foreign relative or loved one. That being said, foreign inheritances do have an upside; they’re non-taxable, depending on certain variables. Despite that fact, you still need to report it to the IRS, even if you live overseas.

Reporting a foreign inheritance to the right agencies requires a few simple forms. However, understanding which forms apply to your situation can be difficult. The most important one is IRS Form 3520. This is necessary to complete if your foreign inheritance exceeds $100,000 in value. There are other forms and agencies in addition to the IRS that shouldn’t be left out. You may have to file IRS Form 8938 and report to the Financial Crimes Enforcement Network. The silver lining, however, is that the IRS probably won’t tax your foreign inheritance.

The CPAs for American expatriates at US Tax Help can simplify receiving a foreign inheritance. Our certified public accountants can help you understand which forms you must file to properly report your inheritance and avoid fines. To learn more about how to report your foreign inheritance, visit our website or call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.

How Do You Report a Foreign Inheritance to the IRS?

American expatriates who receive a foreign inheritance while living overseas may still need to report it to the IRS. Despite residing abroad, American citizens must disclose certain aspects of their financial status to the IRS each year. As long as you retain your citizenship status, you must pay taxes and report certain gains, including foreign inheritances.

IRS Form 3520

As with any other reporting made to the IRS, there is a form you must complete to report your foreign inheritance. Using IRS Form 3520, any American who has received a foreign inheritance over a specific aggregate sum must report it to the IRS. If the inheritance you receive is from a non-American resident or citizen, you only need to report it if it exceeds the equivalent of $100,000. That doesn’t mean just cash, either. It applies to the value of any asset you have received as part of your foreign inheritance. When your foreign inheritance is valued at more than $100,000, you must report it to the IRS.

Reporting your foreign inheritance to the IRS is for informational purposes. When American expats receive an inheritance from a foreign person or trust, it’s not taxable in the United States. While some states have different laws regarding taxing a foreign inheritance, as long as your money stays out of the United States, and if you’ve been a permanent resident in another country for long enough, your inheritance shouldn’t be taxed by the IRS. Although your foreign inheritance isn’t taxable, you still must report it. If you don’t, you can face hefty fines. That’s why it’s important to have help from experienced professionals, like the CPAs for American expatriates at US Tax Help. Having to report a foreign inheritance is a relatively new requirement, so expats might not be aware that they must do so.

IRS Form 8938

In addition to Form 3520, the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, you might have to complete other forms as well. For example, American expatriates living overseas may be unaware that their foreign financial assets are reportable to the IRS. Using Form 8938, American expats must report their foreign financial assets for the tax year if they exceed a certain amount. For those filing independently, you have to report if your aggregate foreign financial assets exceeded $200,000 on the last day of the tax year or $300,000 at any point during that year. For American expats filing jointly, the threshold is $400,000 on the final day of the tax year and $600,000 at any point during that year. American expats have to also complete IRS Form 8938 if the foreign inheritance they’ve received has caused their foreign financial assets to exceed the threshold of their filing requirements.

Why Do You Have to Report Your Foreign Inheritance to the IRS?

The IRS likes to keep tabs on American money overseas. Although the IRS won’t tax your foreign inheritance, if it remains abroad, it’s still important to report it. Along with reporting to the IRS, you may have to report to other federal agencies as well, something that even long-time expatriates might not be aware of.

Having the guidance of a trusted accountant, like the CPAs for American expatriates at US Tax Help, is beneficial. For example, failure to report your foreign inheritance to the IRS alone can result in serious financial penalties. For every month you fail to report, you can be charged 5% of the total amount of your inheritance.

The IRS isn’t the only federal agency that cares about your earnings and holdings. In fact, the Financial Crimes Enforcement Network, or FinCEN, also requires American expats to report certain aspects of their finances. If you receive a foreign inheritance that greatly increases funds in foreign bank accounts, you may have to report it to FinCEN. This agency exists to combat money laundering overseas and has strict penalties for reporting failure, just like the IRS. You must file FinCEN Form 114 if your aggregate financial assets in foreign bank accounts exceed $10,000. A Report of Foreign Bank and Financial Accounts, also known as FBAR, is required in this circumstance. It’s more likely that you’ll have foreign financial assets if you live overseas, which is why expats should work with experienced accountants, like the CPAs for American expatriates at US Tax Help.

You may also have to file FinCEN Form 104 if you transfer any amount of your foreign inheritance to an American bank account. That being said, if you’re an established expatriate, you may no longer have any remaining assets or accounts in the United States. The purpose of reporting to agencies like FinCEN and the IRS isn’t to make you pay taxes, necessarily. In fact, your foreign inheritance won’t even be taxed if it remains in foreign accounts. Reporting your financial assets and earnings helps the IRS to stay on top of American money overseas.

Learn How to Report a Foreign Inheritance to the IRS

When you receive a foreign inheritance, you shouldn’t face fines for failure to report it to the IRS. To learn more about reporting a foreign inheritance to avoid penalties, visit our website or call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.