This article is written with Cross-Border persons in mind, especially Japanese nationals who are U.S. green card holders, but there are some points of reference for U.S. green card holders who receive their heritage from their home country.
U.S. permanent residents so-called green card holders (including U.S. residents for tax purposes) who received an inheritance from a Japanese parent in 2023 may be required to file a tax return for the 2023 tax year.
Is your international inheritance required to be reported to the IRS?
If you receive an inheritance worth more than $100,000 in U.S. dollars from your Japanese parents, you must report this fact to the U.S. Tax Service (IRS). This includes all property types, including real estate, securities, and cash. This report must be made on Form 3520 by April 15 of the year following the year in which the property was received but can be extended to October 15 if necessary.
Example: If you received an inheritance in 2023, you must report it by April 15, 2024.
Do I have to pay taxes in the U.S.?
Unlike Japan’s inheritance tax, there will be no additional U.S. taxes on the property you receive. This is because in the United States, there is a concept of “Estate” tax in which the deceased is obligated to pay taxes, and unless the Japanese parent is a resident of the United States, the United States government does not have taxation rights. However, it is also true that there are states in the U.S. that collect inheritance tax.
Estate tax is a tax that is levied on the estate of the deceased, whereas inheritance tax is a tax that is levied on the individual heirs who receive the estate. This means the person receiving the inheritance is directly responsible for paying taxes, like Japan’s inheritance tax. Currently, only some states collect Inheritance Tax, and the number is limited. The concept of inheritance tax is mostly imposed on property located within the state (real estate within the state, financial assets within the state, etc.), and property located in Japan is generally outside the scope. The tax rate may vary depending on the relationship between the heir and the deceased and the type of inheritance received, and it may be exempt under certain conditions. For example, inheritance from a spouse is not subject to inheritance tax, but inheritances below a certain amount from direct relatives are tax-exempt. I will discuss this in another article.
What is the penalty for violation?
Now, failure to report this international inheritance on Form 3520 is 5 percent of the unreported gift or bequests amount for each month of delay, with a maximum penalty of 25 percent. In addition, the penalty is 35 percent of the amount received from a non-U.S. trust or $10,000, whichever is greater. In addition, ignoring notices from the IRS can result in even heavier penalties. The penalty for failure to file or incomplete or inaccurate filings can be significant, but exceptions may be made, and the penalty may be waived if the taxpayer has a legitimate reason and shows good faith.
Notes on international inheritance
Please note that the IRS has been aggressively enforcing international inheritance penalties in recent years. If the inherited property is a financial asset, it may be necessary to file not only Form 3520 but also FBAR (FinCEN Form 114).
If the property a U.S. permanent resident received as an inheritance from their parents in Japan is a financial asset, and as a result, the amount of their Japanese financial assets exceeds $10,000, they will be required to file an FBAR (FinCEN Form 114). This is for reporting information about bank and other financial accounts located outside the United States to the United States government. Even if the year-end balance in your Japanese bank is less than $10,000 because you transferred the inherited money to your American account via overseas remittance in the same year, you still need to submit if it exceeds $10,000 at any time during that year. Also, please note that this threshold of $10,000 is the aggregated amount of assets held, not the amount for each account. So, if you have 3 accounts, each holding $4,000, the total amount is $4,000 x 3 accounts = $12,000.
Important points and penalties regarding FBAR
If you willfully fail to file an FBAR (Report of Foreign Bank and Financial Accounts), you may be subject to a penalty of up to $100,000 or 50% of your account balance, whichever is greater. Even non-willful violations may result in a penalty of $10,000 (currently $15,611, as this amount changes with inflation) per violation (per Form).
What to do if there is a FBAR delinquency?
When you notice your delinquency of submitting an FBAR, there are cases where you notice not only that you forgot to submit an FBAR for that year, but also that you forgot to submit FBARs for previous years. This means that in addition to reporting on your inheritance, you also failed to report on your foreign financial assets. The penalties keep adding up. Resolution regarding such cases should be done carefully with the help of experts. The tax authority may waive the penalty by applying for penalty abatement only if it determines that there is “just cause.” To do so, the taxpayer must prove that the failure to file a tax return was not willful and was due to reasonable cause. It is recommended that this procedure be undertaken by an expert.
This information is a general overview of the tax obligations and associated considerations that U.S. permanent residents may face when receiving an inheritance from their Japanese or foreign parents. Please keep in mind that your specific case requires expert advice. Now that information exchange between governments is progressing, timely action is the key to avoiding major trouble.
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CDH Cross-Border Practice specializes in tax consulting and filing services for Cross-Border individuals involved in the United States or abroad. Our mission is to address and clarify the myriad issues faced by these individuals daily. The challenges they encounter are diverse and intricate, encompassing not only the tax laws of their own countries and the United States but also immigration policies, life insurance, and retirement regulations. Our articles aim to demystify complex tax laws and regulations, making them accessible and understandable. However, it’s important to note that exceptions abound, and there is always the possibility that rules may have changed by the time you read this. For the most current practices, please visit our website. We also strongly advise consulting with tax and legal experts before taking any action.
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