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The Internal Revenue Service (IRS) is the federal agency in charge of tax collection in the United States. Before the agency, taxpayers must file their tax return every year, and it is the one that takes action against those who do not meet their tax obligations.

One of the things the IRS is allowed to do is intervene family inheritances. Although this is not an automatic process, it is possible if a combination of factors occurs, such as failing to report the assets received.

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What is the first thing you need to do after receiving an inheritance?

First of all, the IRS recommends identifying the type of assets that were inherited and determining whether there are financial assets outside U.S. territory. Often, taxpayers may think that an inheritance has no tax obligations, but that is a mistake.

Although an inheritance is not taxed as federal income, it becomes part of the deceased person’s estate and must be detailed in the Final Return of the Deceased (Form 1040), which must be filed by the estate’s representative or the surviving spouse.

The following must be included:

  • All income earned
  • Salaries
  • Retirements and pensions
  • Bank interest
  • Dividends
  • Investment income
  • Applicable deductions and tax credits

If this procedure is not carried out, the IRS can determine taxes owed, interest and penalties on the inheritance, and claim payments before it is transferred to the heirs named in the will.

What happens if the inherited assets generate income?

If the inheritance generates income, Form 1041 must also be filed. It applies to:

  • Savings accounts that earn interest
  • Stocks that pay dividends
  • Bonds
  • Investment funds
  • Rental properties
  • Certificates of deposit

Bank accounts, vehicles, and properties abroad: can the IRS also seize them if I do not report them?

The IRS may proceed with a seizure of these assets if they are not reported. In particular, what can cause problems is that there are tax obligations tied to the inherited assets and the taxpayer fails to comply with them.

Bank accounts:

These types of assets are the ones that attract the IRS’s attention the most. If a person inherits an account outside the United States and certain thresholds are exceeded, they may have to file forms such as the FBAR or FATCA Form 8938.

Failure to comply can result in fines, and if there are unpaid tax debts, also in a seizure by the IRS.

Vehicles:

In themselves, they usually do not generate obligations. However, as part of the estate, if a valid tax debt is determined and the taxpayer does not pay it after being notified, it is one of the assets that may be subject to seizure.

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Properties:

These types of assets are not reported on FBAR, but they can generate other tax obligations:

  • If the property is rented out, the income earned could be subject to tax in the United States
  • If it is sold, there could be capital gains that must be reported
  • If it is part of certain financial structures or foreign trusts, additional reporting rules could apply
  • If the obligations are not met, the IRS may proceed with a seizure.
  • The forms to file in each case: FATCA vs FBAR

The type of form to be filed may vary depending on the situation. Although the two most common obligations are FATCA and FBAR, they are not the same.

FATCA (Form 8938)

Form 8938 is filed together with the federal tax return and is used to report certain financial assets held outside the United States.

Among the assets that may be covered are:

  • Foreign bank accounts
  • Foreign-issued stocks and bonds
  • Ownership interests in foreign companies
  • Trust interests
  • Other international financial assets

FBAR (FInCEN Form 114)

The FBAR is a report separate from the tax return and is filed with the Financial Crimes Enforcement Network (FinCEN).

The obligation arises when the combined value of all foreign financial accounts exceeds $10,000 at any point during the year, even if only for one day.

This form must include information such as:

  • The financial institution where the account is held.
  • The country where it is opened.
  • The account number.
  • The highest balance reached during the year.
  • The type of account or financial product.