U.S. Tax On Inheritance from Overseas – IRS International Reporting
- 1 U.S. Estate Tax is Limited
- 2 U.S. Tax
- 3 Brian is a U.S. Citizen
- 4 Estate Tax vs. Inheritance Tax
- 5 Peter – U. S. Citizen
- 6 Brian’s Grandma – Foreign Person
- 7 What if Brian’s Grandma did Have U.S. Situs
- 8 Some of the Assets Earn Income
- 9 IRS Reporting Foreign Inheritance
- 10 Why do they Care?
- 11 Reporting Rules
- 12 What Can You Do?
- 13 We Specialize in Safely Disclosing Foreign Money
- 14 Who Decides to Disclose Unreported Money?
- 15 Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
- 16 Beware of Copycat Law Firms
- 17 4 Types of IRS Voluntary Disclosure Programs
U.S. Tax on Inheritance from Overseas and the IRS International Reporting Rules are two of the most common inquiries we receive at Golding & Golding.
When it comes to US tax and IRS International Reporting rules, the topics needs needs to be broken down into three different parts
- U.S. Tax on the Inheritance from Overseas
- U.S. Tax on the income generated from the Inheritance from Overseas
- IRS Reporting of the Inheritance from Overseas (FBAR & FATCA)
U.S. Estate Tax is Limited
For many of our clients, they will be glad to find out that right from the start, unless US situs is involved, a US person who is inheriting a foreign estate from a foreign person who had no ties or residency issues to the United States will not have to pay any tax on the estate.
Typical Example: Brian comes to our office and tells us that he received an inheritance of $3 million from his grandma. His grandparents were very wealthy, and they split a $15 million inheritance over five different grandkids. Luckily for Brian, he stayed in his grandma’s good graces and didn’t do anything during his lifetime to make his grandma revoke the gift (good job, Brian).
Brian is a U.S. Citizen
Brian moved to the United States with his family when he was very young. He obtained his citizenship through his parents as a minor and has been a US citizen for the majority of his life.
As a result, will the United States tax Brian on the estate, since Brian is a U.S. citizen?
No, based on these facts the IRS will not tax Brian on his inheritance.
Estate Tax vs. Inheritance Tax
When a person dies, the first thing the United States will look to see is if the person is a U.S. Person, and what is the value of the decedent’s estate. If the value of the estate is over the exemption amount, and the decedent is a U.S. Person, then the United States may be able to tax the estate that is above the exemption amount — at the alarming rate of 40% per dollar.
Since Brian’s Grandma is a non-U.S. Person with no U.S. Situs, she will not be taxed (See Below)
Peter – U. S. Citizen
Another Example with a Different Outcome: Peter is a US citizen who passed away in 2016. He has never gifted any of his money beyond the annual exclusion amount. When he died, Peter’s estate was worth $10 million. He does not have any charitable trusts, Irrevocable Trusts, a spouse to claim portability…or any other mitigating components to his estate.
Therefore, the estate would be taxed at the amount which is above and beyond the exemption. In the current year, Peter’s estate would be taxed at around $1.8 million (40% of 4.5 million)
Since Peter was a US citizen, the United States has the opportunity to tax the estate on its worldwide assets. Therefore, since Peter has land in the United States as well as multiple other countries, the total aggregate value will be taxed by the IRS. Peter may be able to mitigate the double taxation though, since the United States has estate tax treaties with 16 different countries — and therefore, Peter may be able to minimize some of his U.S. Estate Tax.
Brian’s Grandma – Foreign Person
Brian’s grandma resides in a foreign country. She is, and has always been a non-US person, with no ties to the United States other than the fact that her daughter married a U.S. citizen and they reside in the United States.
**There are very complicated estate tax rules that apply to U.S. Persons or Long-Term Permanent Residents who renounce citizenship or relinquish their Green-Card, relocate overseas, an leave an estate (or gifts) in excess of the exemption amount.
Aside from not being subject to U.S. Tax as a U.S. Person, Brian’s grandma also never invested in the United States and therefore, she does not have any U.S. situs. As such, and despite the fact that her Estate has net worth of $25 million, with many of the beneficiaries qualifying as U.S. Persons, none of the estate is subject to any taxation by the United States. Why? Because as a non-US person with no U.S. investments, the United States does not have any reach over Brian’s grandma.
Stated another way, it is not as if the United States government gets the opportunity to tax non-US persons with non-US investments solely because the recipient of the estate/inheritance is a US person. Remember, it is the estate that is taxed.
What if Brian’s Grandma did Have U.S. Situs
Currently, the gift and estate tax exemption is around $5.5 million. Therefore, a U.S. person could feasibly pass away with $5 million of U.S. assets, foreign assets, or a mix of the two – but as long as it is under $5.5 million (subject to any gifting that occurred during life) there would be no tax.
Conversely, when a non-US person owns US property and then passes away, the exemption amount is closer to $60,000. Therefore, using this example if Brian’s grandma had US situs that was above $60,000 then that US situs only (not the foreign assets) would be taxed at 40%.
If Brian’s Grandma was considered a U.S. person, she would have to had employed various Gifting, Family Business (minority discounts) and Irrevocable Trust strategies during life in order to try to reduce the value of the estate during life.
Some of the Assets Earn Income
As part of the inheritance, Brian received a mutual fund located in the foreign country. The mutual fund generates significant income for Brian. As a result, Brian will have to report the income to the United States and pay tax on the income as well.
In other words, while Brian’s grandma’s $3 million inheritance to Brian is not taxed as estate tax any future income generated from it would be taxed as income tax to Brian.
IRS Reporting Foreign Inheritance
Continuing from above, since the United States cannot tax the inheritance, they are going to do what they can to force the recipient of the money (Brian) to report the money to the United States government.
Why do they Care?
It is relatively simple and straightforward: Currently, the gift and estate tax exemption is $5.5 million. Let’s say instead that Brian received $10 million from his grandma. Five years later, Brian dies. If Brian was not forced to report the $10 million he received from his foreign person grandma, the IRS would have no way of knowing that Brian had a value of over $10 million.
As a result, the United States would have no way of knowing that Brian estate would be subject to estate taxes of around 2 million.
While you may be wondering (rightfully so) why would Brian report the inheritance if it’s only going to be taxed in the future? The answer simple – if the IRS learns of the inheritance and the lack of reporting, the penalties alone will reduce the value of the estate significantly.
The following is a non-exhaustive list of common IRS International Tax Reporting forms.
Since Brian received a foreign gift (albeit an inheritance) from overseas, he has to report the receipt of the gift on the year he received it, on a form 3520. It is a very simple reporting form, but the failure to file a timely can result in significant penalties. As a result, Brian should file this form timely at the same time he files his current tax return — either in April or on extension.
Since Brian is the owner of foreign mutual funds and other accounts that exceed $10,000 in annual aggregate total, Brian will also have the file an annual FBAR statement. This statement is not necessarily difficult to complete, although the penalties for failing to file a timely FBAR are severe. And, if the IRS believed Brian was Willful, they can try to come after him the full amount of the accounts.
FATCA Form 8938
FATCA is the Foreign Account Tax compliance Act. Is a relatively new law requiring certain individuals significant amounts of specified foreign financial assets to report the form to the IRS. Rhe reason why this form is a bit more menacing than other forms is because it is actually included with your tax return.
In addition, unlike some other forms listed above, FATCA Form 8938 requires the individual to itemize the different types of income that was received, as well as:
- Which accounts generated income
- Whether the accounts were opened in the current year
- Whether the accounts were close in the current year
- If the account of jointly owned
An 8621 is a complicated form involving passive foreign investment companies. We have written numerous blog posts and articles on this issue and have been invited to speak as presenters to different organizations on this issue.
It is tedious and boring, but the most important take away from this form is that the failure to file it leaves your tax return open. In other words, if you do not file this form and is otherwise required, then the statue limitations for the return does not yet begin to run.As a result, the tax return could be audited many years into the future.
In addition, if a person does not make a mark-to-market election, then in years that they received an excess distribution, the tax liability amounts to a penalty tax which can reach 50 to 75%, if not higher of the value of the PFIC.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)
Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Who Decides to Disclose Unreported Money?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists
The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.
In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
Contact Us Today; Let us Help You.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)