What Form 706-NA Is For

Form 706-NA—officially titled "United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States"—is the IRS document used to calculate and report estate taxes on U.S. property owned by someone who was neither a U.S. citizen nor a U.S. resident when they died.

Think of it this way: if someone lived in Canada, Germany, or any other country and never became a U.S. citizen, but owned a vacation home in Florida or stocks in American companies, their estate might owe U.S. estate tax on those assets. Form 706-NA is how the IRS figures out how much tax is owed on the deceased person's American property.

The form covers two types of taxes: the regular estate tax and the generation-skipping transfer (GST) tax. The estate tax applies to the total value of U.S. assets the person owned at death, while the GST tax applies if assets skip a generation—for example, going directly from grandparent to grandchild rather than to the parent first.

When You’d Use Form 706-NA

Standard Filing Timeline

Form 706-NA must be filed within nine months after the date of death. For someone who died in 2012, the deadline would have been nine months from their date of death. If you needed more time, you could request an automatic six-month extension using Form 4768.

Late Filing

If you missed the original deadline, you should still file as soon as possible. The IRS imposes penalties for late filing unless you can demonstrate "reasonable cause" for the delay. Late filing penalties can be substantial, but they won't be assessed if you have a legitimate reason, such as not realizing the deceased person owned U.S. assets or facing genuine obstacles in gathering necessary documents.

Amended Returns

Sometimes you discover errors after filing the original return—perhaps you found additional property, discovered incorrect valuations, or need to claim additional deductions. To file an amended Form 706-NA, you prepare a new complete form, write "Supplemental Information" across the top of page one, and attach copies of pages 1, 2, and 3 from the original return you already filed. If the IRS has already contacted you about examining the return, send corrections directly to the examining office rather than filing another return.

Key Rules or Details for 2012

Several important thresholds and rules applied specifically to estates of nonresident aliens who died in 2012:

• Filing Threshold: You must file Form 706-NA if the total value of U.S.-situated property at death exceeded $60,000. This threshold is dramatically lower than the $5.12 million exemption that applied to U.S. citizens and residents in 2012, reflecting the limited exposure to U.S. taxation for foreigners.
• Tax Rate: The maximum estate tax rate for 2012 was 35%. The tax uses a progressive rate schedule starting at 18% for amounts over $10,000 and climbing to the maximum 35% rate.
• Unified Credit: Nonresident alien estates received a unified credit of $13,000 (equivalent to exempting about $60,000 worth of property from tax). However, if the deceased person was a citizen of certain countries with estate tax treaties with the United States, they might qualify for a larger credit.
• What Counts as U.S. Property: Understanding which assets are taxable is crucial. U.S.-situated property includes:
  • Real estate physically located in the United States
  • Stocks of U.S. corporations (regardless of where certificates are kept)
  • Tangible personal property located in the U.S.
  • Certain debt obligations
    Importantly, several asset types are not taxed: U.S. bank deposits, certain portfolio debt, life insurance proceeds, and assets held in foreign branches of U.S. banks are generally excluded from the taxable estate.

Step-by-Step (High Level)

Step 1: Determine If Filing Is Required

Calculate the total fair market value of all U.S.-situated assets the deceased person owned at death. If this exceeds $60,000 (after considering certain adjustments for prior gifts), you must file.

Step 2: Gather Documentation

Collect death certificates, certified copies of the will (if one exists), proof of citizenship and residency status, property appraisals, stock certificates or brokerage statements, bank records, and documentation of debts and expenses. You'll also need any U.S. gift tax returns (Form 709) the deceased person previously filed.

Step 3: Identify and Value All U.S. Assets

List every piece of U.S. property on Schedule A. This includes real estate, stocks, bonds, tangible personal property, jointly owned property, and assets transferred during life that are still includible in the estate. Property is generally valued at its fair market value on the date of death, though you can elect alternate valuation (six months after death) if it reduces both the estate value and the tax due.

Step 4: Calculate Allowable Deductions

On Schedule B, you can deduct funeral expenses, administration costs, debts of the deceased, mortgages, and certain losses. For 2012, you could also deduct state death taxes actually paid on the U.S. property. These deductions are generally limited to the proportion of such expenses attributable to U.S. property.

Step 5: Compute the Tax

Apply the unified rate schedule to determine the tentative tax, then subtract the $13,000 unified credit and any applicable treaty benefits or other credits.

Step 6: Complete and Sign

The executor must sign the return under penalties of perjury. If a paid preparer completed the form, they must also sign and provide their information.

Step 7: File and Pay

Mail the completed return with all attachments and schedules to the IRS center in Cincinnati, Ohio. Payment of any tax due should accompany the return or be made electronically through EFTPS.

Common Mistakes and How to Avoid Them

Mistake #1: Failing to File Because Assets Seem Minimal

Many executors don't realize the $60,000 threshold is quite low. A small condo or modest stock portfolio can easily exceed this amount. Solution: Always calculate the total value of U.S. assets, even if they seem insignificant.

Mistake #2: Incorrect Asset Situs Determination

Not all assets a deceased foreign person owned are subject to U.S. estate tax. Bank deposits, for example, are generally exempt. Solution: Carefully review IRS rules on what constitutes "U.S.-situated property" and consult the instructions or a tax professional when unsure.

Mistake #3: Missing Treaty Benefits

The U.S. has estate tax treaties with many countries (including Canada, Germany, France, Japan, and the United Kingdom) that can significantly reduce or eliminate tax. Solution: If the deceased was a resident of a treaty country, research applicable treaty provisions or consult an international tax specialist.

Mistake #4: Improper Valuation Methods

Using book value instead of fair market value, or failing to obtain professional appraisals for real estate and closely held businesses, can trigger IRS scrutiny. Solution: Use qualified appraisers for complex assets and follow IRS valuation guidelines meticulously.

Mistake #5: Not Attaching Required Supporting Documents

The IRS requires certified copies of wills, death certificates, appraisals, and other documentation. Missing attachments delay processing. Solution: Review the IRS checklist and ensure all required documents are certified and attached before mailing.

Mistake #6: Overlooking Deductible Expenses

Executors sometimes fail to claim legitimate deductions for funeral costs, administration expenses, debts, and mortgages. Solution: Keep detailed records of all estate expenses and debts, and ensure they're properly documented and allocated to U.S. property.

Mistake #7: Mathematical and Computational Errors

Simple arithmetic mistakes can trigger IRS correspondence and delays. Solution: Double-check all calculations, use tax preparation software when appropriate, and consider having a tax professional review the return before filing.

What Happens After You File

Initial Processing

After you mail Form 706-NA to the IRS Cincinnati center, it enters their processing system. The IRS logs the return, checks for completeness, and processes any payment accompanying it. This initial phase typically takes several weeks.

IRS Review

The IRS reviews the return for accuracy and completeness. For many straightforward returns with no red flags, this review results in acceptance of the return as filed. However, the IRS may select some returns for examination (audit), particularly those with:

• Large estates
• Complex assets requiring valuation
• Claimed treaty benefits
• Unusual deductions
• Assets in multiple countries

Examination (If Selected)

If your return is selected for examination, you'll receive correspondence from the IRS requesting additional documentation or clarification. This doesn't necessarily mean you did something wrong—it's often routine for returns claiming certain benefits or involving substantial assets. You may need to provide additional appraisals, bank records, or explanations. This process can take many months or even years.

Estate Tax Closing Letter

The IRS may issue an estate tax closing letter (Letter 627) that confirms the IRS has accepted the return and specifies the final tax liability. The closing letter provides peace of mind and can be important for executors to show beneficiaries and financial institutions that the estate's tax obligations are resolved.

Payment and Refunds

If you owed additional tax after IRS adjustments, you must pay within a specified timeframe to avoid interest and penalties. Conversely, if the examination results in a refund, the IRS will issue a check with interest on the overpayment.

Statute of Limitations

Generally, the IRS has three years from when you file to assess additional tax. However, this period extends to six years if you substantially undervalued property (by 65% or more of actual value), and there's no statute of limitations if you never filed or filed a fraudulent return.

FAQs

Q1: I'm the executor of a German citizen's estate who owned a New York apartment worth $120,000. Do I need to file Form 706-NA?

Yes, you must file. The U.S.-situated property value ($120,000) exceeds the $60,000 filing threshold. However, because Germany has an estate tax treaty with the United States, you may qualify for treaty benefits that could reduce or eliminate the tax. You should consult with a tax professional familiar with the U.S.-Germany estate tax treaty to determine what benefits apply.

Q2: The deceased person had $80,000 in a U.S. bank account and $50,000 in stocks of U.S. companies. Which assets do I report?

You only report the stocks ($50,000). U.S. bank deposits held by nonresident aliens are generally not subject to U.S. estate tax and are excluded from Form 706-NA. The stocks of U.S. corporations, however, are U.S.-situated property and must be reported. Since the stock value is under the $60,000 filing threshold, you likely don't need to file unless there are other U.S. assets.

Q3: Can I get an extension to file Form 706-NA?

Yes. You can request an automatic six-month extension by filing Form 4768 before the original nine-month deadline. This extends your time to file the return but does not extend the time to pay any tax due. You must still estimate and pay the tax by the original nine-month deadline to avoid interest and penalties on late payment.

Q4: What happens if I discover additional U.S. property after filing the return?

You should file an amended Form 706-NA. Prepare a complete new return, write "Supplemental Information" at the top, and attach copies of pages 1-3 of the original return. Include the newly discovered property and recalculate the tax. If this results in additional tax owed, pay it with the amended return along with any applicable interest. Filing an amended return voluntarily before the IRS discovers the omission can help minimize penalties.

Q5: How do I know if property is "U.S.-situated" for estate tax purposes?

The general rules are:

• Real estate and tangible personal property: Located where physically present
• Stock: U.S. corporations = U.S. property; foreign corporations = foreign property
• Bonds and debt: Generally U.S. property if issued by U.S. persons, with important exceptions for certain portfolio debt
• Bank deposits: Not U.S. property
• Life insurance: Not U.S. property

The instructions for Form 706-NA contain detailed rules, and many situations require professional analysis, especially regarding bonds and debt instruments.

Q6: What documentation must I attach to Form 706-NA?

Required attachments include:

• Certified copy of the death certificate
• Certified copy of the will (if the person died with a will)
• Appraisals for real estate and closely held business interests
• Form 712 (Life Insurance Statement) for any U.S. life insurance
• Copies of any U.S. gift tax returns (Form 709) the deceased filed
• Certificate from state tax authorities showing state death taxes paid
• Documentation supporting treaty claims (if applicable)
• Schedules E, G, H, M, O, or U from Form 706 (U.S. citizen/resident return) if claiming certain deductions or benefits

Q7: Is there any way to reduce the estate tax for a nonresident alien estate?

Yes, several strategies may help:

• Treaty benefits: Many countries have estate tax treaties with the U.S. that provide credits or exemptions
• Charitable deductions: Transfers to U.S. charities may be deductible
• Marital deduction: Transfers to a U.S. citizen spouse or qualified domestic trust (QDOT) may qualify
• Ownership restructuring (before death): Holding U.S. investments through foreign corporations or investing in assets not subject to U.S. estate tax
• Full deduction of debts and expenses: Ensure all legitimate administration expenses, funeral costs, and debts are properly claimed

Additional Notes and Reminders

Filing Form 706-NA for a 2012 estate is a complex task that requires careful attention to detail. The information in this guide provides a general overview based on IRS sources, but each estate situation is unique. Given the complexity of international estate tax law, the potential for treaty benefits, and the serious consequences of errors, most executors benefit from consulting with a tax professional experienced in nonresident alien estate taxation.

For the most authoritative and detailed information, always refer to the official IRS Form 706-NA instructions and Publication 519 (U.S. Tax Guide for Aliens), available at IRS.gov.

Sources

• IRS Instructions for Form 706-NA (2011 revision applicable to 2012)
• IRS Instructions for Form 706 (August 2012)
• IRS - Transfer Certificate Filing Requirements for Nonresidents
• IRS - Frequently Asked Questions on Estate Taxes
• IRS - About Form 706-NA