Understanding IRS Form 706-NA: Estate Tax Return for Nonresident Aliens

What Is IRS Form 706-NA?

Internal Revenue Service Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return for Nonresident Aliens, is the tax form used to report and pay U.S. estate taxes on the assets of nonresident alien (NRA) decedents.

Unlike Form 706, which applies to U.S. citizens and residents, Form 706-NA is specifically designed for estates where the decedent was not a U.S. citizen or resident at the time of death but owned certain U.S.-situated assets. If estate tax applies, a Federal Transfer Certificate may also be required for asset distribution.

Who Needs to File IRS Form 706-NA?

Form 706-NA must be filed if a nonresident alien’s U.S. estate exceeds the $60,000 exemption threshold. This is a much lower threshold compared to the multi-million-dollar exemption available to U.S. citizens and residents.

Key Filing Requirements:

• The decedent was a nonresident alien at the time of death.
• The gross estate includes U.S.-situated assets exceeding $60,000 in total value.
• The estate does not qualify for estate tax treaty benefits that may exempt or reduce estate tax liability.

Failure to file can delay asset transfers and result in penalties.

How to File IRS Form 706-NA

Step 1: Determine Taxable Assets

• Create a comprehensive inventory of U.S.-situated assets.
• Confirm their fair market value as of the date of death.

Step 2: Apply Deductions and Exemptions

• The $60,000 exemption applies to all nonresident alien estates.
• Certain deductions (e.g., debts, funeral expenses, administration costs) may be available. More on this below.

Step 3: Calculate Estate Tax

• U.S. estate tax rates range from 18% to 40%, similar to those for U.S. citizens.
• Taxable estates exceeding the exemption must file Form 706-NA.

Step 4: Submit Form 706-NA to the IRS

• File within 9 months of the date of death (extensions available).
• Send the completed form and supporting documents to the IRS in Cincinnati, OH.

Allowable Deductions and Credits for Form 706-NA

When completing Form 706-NA, understanding the available deductions and credits is crucial for reducing tax liability (Step 2 above). Below are some key deductions and credits that may apply:

• Charitable Deductions – Donations made to qualified charitable organizations can be deducted from the gross estate.
• Marital Deductions – Transfers to a surviving spouse may qualify for the marital deduction.
• Qualified Conservation Easement Exclusion – If the decedent donated a qualified conservation easement, the value of that donation may be excluded from the gross estate.
• Credit for Tax on Prior Transfers – If the decedent previously paid U.S. estate tax on inherited assets, this credit may help offset the current tax liability.
• Unified Credit – The unified credit exemption may be available depending on the decedent’s prior taxable transfers and applicable Internal Revenue Code regulations.

To ensure all allowable deductions and credits are properly claimed, it’s essential to review Internal Revenue Service (IRS) guidelines, and consult with international tax lawyers for professional advice. Applying these deductions correctly can significantly reduce the estate tax owed while simplifying the tax return process.

What Assets Are Subject to U.S. Estate Tax?

A nonresident alien’s estate is only subject to U.S. estate tax on assets that are considered to be U.S.-situs. These include:

Common Examples of U.S.-Based Assets That Require Form 706-NA:

• Investment Properties – Rental properties, vacation homes, or any real estate holdings in the U.S.
• U.S. Stocks & Securities – Shares in publicly traded or private U.S. corporations.
• Business Interests – Ownership stakes in U.S. partnerships, LLCs, or corporations.
• Tangible Personal Property – Art, jewelry, or collectibles physically located in the U.S.
• Certain Financial Accounts – Some brokerage accounts and assets held within U.S. financial institutions.

Assets Generally Excluded from U.S. Estate Tax:

• Life insurance proceeds from non-U.S. insurance companies
• Non-U.S. real estate and assets
• Bank deposits in U.S. financial institutions (in most cases)

Estate tax treaties between the U.S. and certain countries may exempt or reduce taxation for nonresident aliens. If a treaty applies, proper documentation must be included with Form 706-NA.

How to Obtain a Federal Transfer Certificate

A Federal Transfer Certificate (Form 5173) is often required to release a deceased nonresident’s U.S. assets. This certificate confirms that the estate tax obligations have been met, allowing financial institutions and registrars to transfer ownership of U.S.-situated assets to beneficiaries or heirs.

Is Filing a U.S. Estate Tax Return Required to Obtain a Federal Transfer Certificate?

Yes. Even if no U.S. estate tax liability is owed, the IRS requires the filing of Form 706 or Form 706-NA to establish whether the decedent had any taxable estate in the U.S. Only after the IRS has processed the estate tax return can a formal request for the Federal Transfer Certificate be submitted.

Steps to Request a Federal Transfer Certificate:

1. File Form 706-NA – The estate tax return must be filed with the IRS, even if no estate tax is due.
2. Wait for IRS Processing – The IRS must first review and confirm that no estate tax is owed before issuing the certificate.
3. Submit a Formal Request for the FTC – After the tax return is processed, we can submit a request to the IRS to issue the Federal Transfer Certificate.
4. Include Required Documentation:
   • A certified copy of the decedent’s death certificate.
   • Proof of estate tax payment (if applicable).
   • Documentation verifying the decedent’s citizenship and domicile.
   • A statement explaining why the certificate is needed (e.g., to release assets held in U.S. banks or brokerage accounts).

Since processing times may take several months, it is advisable to submit the request promptly after filing Form 706-NA.

Finalizing the Process: How to Obtain an Estate Tax Closing Letter

The final piece of documentation needed in the estate tax process is the Estate Tax Closing Letter which serves as confirmation from the IRS that an estate tax return has been reviewed and accepted. For nonresident alien estates filing Form 706-NA, obtaining this letter can be crucial to finalizing the estate and ensuring all tax obligations have been met. Beneficiaries and executors should request this letter to avoid any complications with asset transfers or distributions.

The Estate Tax Closing Letter is typically requested after the IRS has processed and reviewed the estate tax return. To obtain this letter, executors or representatives should submit a request to the IRS once they receive confirmation that all required estate tax payments have been made.

What happens if Form 706-NA is filed late or the tax is not paid on time?

Failing to file Form 706-NA or pay the required estate tax liability on time can result in significant penalties and interest:

• Late Filing Penalty – A penalty of up to 47.6% of the unpaid tax may be imposed for late filing, significantly increasing the total amount owed.
• Late Payment Penalty – A penalty of up to 25% of the unpaid tax may apply if the estate tax is not paid by the deadline.
• Interest Charges – Interest on the unpaid estate tax begins accruing from the original due date of the return and continues until full payment is made.

To avoid these penalties and additional costs, it is crucial to file Form 706-NA and pay the estate tax owed by the due date. If an extension is needed, filing IRS Form 4768 can provide an automatic six-month extension to prevent penalties.

6 Mistakes to Avoid When Filing Form 706-NA

Here are the 6 most common mistakes individuals make when filing IRS Form 706-NA. Avoiding these can help ensure a smoother tax filing process and avoid unnecessary penalties.

1. Underestimating Taxable Assets

Many estates fail to account for all U.S.-situated assets, such as stocks in U.S. corporations, leading to incorrect tax filings.

2. Missing the Filing Deadline

Form 706-NA is due 9 months after the date of death. Late filings can result in penalties and interest. If this date has passed, contact an estate and tax planning attorney specializing in federal transfer certificates.

3. Ignoring Estate Tax Treaties

Some estates may qualify for treaty benefits, but failure to apply can lead to excessive tax liability. Consult with an international tax attorney to learn more about a country’s unique treaty deal and how best to apply it to maximize deductions.

4. Incorrectly Valuing U.S. Assets

Fair market value should be determined at the date of death. Inaccurate valuations can lead to tax disputes with the IRS.

5. Overlooking Deductions

Certain expenses, like debts, funeral costs, and administrative fees, can reduce the taxable estate but are often missed.

6. Failing to Obtain a Federal Transfer Certificate

Without Form 5173, U.S. banks and institutions may refuse to release the decedent’s assets to heirs.

Conclusion: Do You Need to File Form 706-NA?

For nonresident aliens who owned U.S. assets, understanding estate tax obligations is crucial. If the estate exceeds $60,000 in taxable assets, Form 706-NA is required to ensure proper tax reporting and avoid complications with asset transfers.

If you need help filing Form 706-NA or securing a Federal Transfer Certificate, Evolution Tax & Legal can assist you. Our international estate tax attorneys provide expert guidance to minimize estate tax exposure and navigate complex cross-border tax rules.

Frequently Asked Questions: Form 706 NA

Q. What is the difference between Form 706 and Form 706-NA?

A. Form 706 is used for U.S. citizens and residents, while Form 706-NA is specifically for nonresident aliens who owned U.S. assets at the time of death.

Q. How long does it take to process Form 706-NA?

A. Processing times vary, but it generally takes 6 to 12 months for the Internal Revenue Service to review and approve Form 706-NA.

Q. How do I compute estate tax liability for a nonresident alien?

A. To compute estate tax liability, you must first determine the gross estate located in the U.S., apply allowable deductions, and then calculate the tax owed using the applicable IRS rates.

Q. What is the importance of the fair market value in estate tax calculations?

A. The fair market value of assets is crucial in determining the decedent’s taxable estate. Assets should generally be appraised as of the decedent’s date of death.

Q. What is the role of the Internal Revenue Service in estate tax processing?

A. The Internal Revenue Service (IRS) oversees estate tax filings, ensuring compliance with internal revenue law, processing tax returns, and issuing Estate Tax Closing Letters upon finalization.

Q. How do I request an automatic six-month extension for filing Form 706-NA?

A. An automatic six-month extension can be requested by filing IRS Form 4768, allowing more time to prepare and submit the estate tax return.

Q. Can a surviving spouse claim any estate tax benefits?

A. A surviving spouse may be eligible for marital deductions or set up a Qualified Domestic Trust (QDOT) to defer U.S. estate tax obligations.

Q. Who should file the estate tax return for a nonresident alien?

A. A qualified estate representative or registered tax professional should handle the estate tax return preparation to ensure compliance with internal revenue code regulations.

Q. Do I need to file a U.S. estate tax return if I already file taxes in another country?

A. Yes. Even if you file taxes in another country, such as Australia, the IRS requires the filing of Form 706-NA to determine whether any U.S. estate tax liability exists before issuing a Federal Transfer Certificate (FTC).

• This filing is necessary even if no U.S. estate tax is owed.
• The U.S. estate tax return is separate from your personal tax filings in your home country.
• Once the IRS processes the estate tax return, we can submit a formal request for the FTC.

If you are unsure whether your estate requires this filing, consulting a U.S. estate tax attorney is highly recommended to ensure compliance.