When a U.S. resident receives an inheritance from a foreign relative, they could be subject to a number of international reporting requirements. Many of these requirements will also apply when a U.S. resident becomes a beneficiary of a U.S. estate that has foreign financial assets.
When a person dies, all assets they owned at death become part of an entity called an ‘estate.’ An estate is a separate legal entity that is distinct from from the deceased person.
When the assets have been distributed from the estate to the beneficiaries, it results in an inheritance.
A U.S. resident who has a beneficial interest in a foreign estate may be required to report their interest in the foreign estate as well as the foreign financial accounts in the estate. Inheriting the assets creates additional reporting requirements.
An executor or a personal representative is the individual who has a fiduciary responsibility to preserve and distribute the estate’s assets to its beneficiaries.
Form FinCEN 114
Form FinCEN 114, Report of Foreign Bank and Financial Accounts (also commonly known as the Foreign Bank Account Report, or “FBAR”) is required to be filed annually by “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country.”
A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. If you are required to file an FBAR, you must file it with the Department of Treasury by April 15th of each tax year. It is automatically extended to October 15 if you file an extension for your individual income tax return.
FBAR filings on FinCEN Form 114 are generally required to be made by U.S. persons who have reportable financial interests in or signature authority over a foreign financial account (“FFA”). A U.S. person who has more than a 50% beneficial interest in an estate’s foreign accounts may be deemed to have an FFA interest and may be required to make an FBAR filing.
Executors and personal representatives
A U.S. executor or personal representative of a foreign trust generally has signature authority over and/or a financial interest in the estate’s foreign accounts and thus, must file the FBAR form.
Form 1040, Schedule B
Beneficiaries and personal representatives that have financial interest in or signature authority over a foreign account in an estate must check the appropriate boxes on Part III of Schedule B.
Form 8938, FATCA
The “FATCA” (Foreign Account Tax Compliance Act) provisions require specified individuals to report ownership of specified foreign financial assets if the total value exceeds the applicable reporting threshold. Form 8938 is due on the date your income tax return is due, including extensions. It is filed with your income tax return.
A beneficiary of a foreign estate must report their beneficial interest in the estate on Form 8938.
Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000, and a penalty up to $50,000 for continued failure after IRS notification.
When a U.S. person receives a bequest (inheritance) from a foreign person in excess of $100,000, the transaction requires a Form 3520 filing requirement.
The penalties for failing to file or late-filing a Form 3520 are often more significant than FBAR penalties. Under 6039F(c)(1)(B), penalties can be up to 25% of the inheritance.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures