While the recent IRS crackdown has increased awareness of filing requirements for foreign assets and income, the requirements regarding foreign inheritances are much less well known. As a rule, there is never a recipient income tax liability on foreign inheritances. Estate tax (for which the estate is liable), is a different matter. If the person leaving the foreign inheritance is a U.S. citizen then it would be subject to estate tax. If not, there is no estate tax liability.
However, even when not taxable, the IRS likes to keep tabs on it. Generally, U.S. citizens receiving the aggregate amount of $100,000 or more in gifts and/or bequests or a foreign estate must report those amounts on the IRS Form 3520 -Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Failure to file (and even late filing of the form) may result in substantial penalties, unless the taxpayer can demonstrate that failure to comply was due to a reasonable cause and not willful neglect. To view the Form 3520 click here :Form 3520