Foreign Inheritance and U.S. Tax — What You Need to Know Before Accepting an Inheritance

When a Foreign Inheritance Creates U.S. Tax Obligations

Receiving an inheritance from a family member abroad can create U.S. reporting obligations. U.S. citizens and resident aliens, including people who meet the green-card or substantial presence test, generally must report qualifying foreign inheritances. Residency starting dates, treaty positions and exceptions need separate review. The inherited property itself is generally excluded from federal gross income, but inherited retirement benefits, income in respect of a decedent and income subsequently earned by inherited property can be taxable.

The distinction matters: a U.S. person generally must report gifts and bequests exceeding $100,000 from a nonresident alien individual or foreign estate during the tax year, applying the related-person aggregation rules. Reporting may be required even when no federal income tax is due on the inherited property. Separately, covered gifts or bequests from certain former U.S. citizens or long-term residents can trigger recipient tax under section 2801 and Form 708 reporting; the ordinary income-tax exclusion does not resolve that issue.

Review the relevant notices, filing history, records, and deadlines before choosing a response. Evaluate professional assistance according to the facts, applicable law, and agreed scope of representation. Related resources: Segal, Cohen & Landis, P.C. (SCL).

Form 3520: The Core Reporting Requirement

A U.S. person who receives more than $100,000 in gifts or bequests from a nonresident alien individual or foreign estate during a tax year generally reports them in Part IV of Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). Apply the related-person and intermediary rules below; do not add unrelated donors together merely because they are foreign. Foreign-trust distributions generally belong in Part III and have different rules, including reporting that does not depend on this gift threshold. See the official Form 3520 instructions.

Key Details About Form 3520 for Inheritances

• Threshold: Aggregate gifts and bequests from the same nonresident alien individual or foreign estate and from foreign persons you know or have reason to know are related, including applicable nominee or intermediary arrangements. The threshold is more than $100,000. Once exceeded, separately identify each gift or bequest exceeding $5,000 as the instructions require.
• Deadline: A calendar-year individual generally files Form 3520 by April 15 of the following year, adjusted for weekends and legal holidays. Qualifying U.S. citizens or residents living and working outside the United States and Puerto Rico, or serving there on military or naval duty, generally have until June 15 and must attach the required eligibility statement. An income-tax filing extension generally extends Form 3520 to no later than October 15. File it separately from the income-tax return; include all required attachments.
• Penalty for failure to file: Unreported foreign gifts or bequests can incur 5% per month, up to 25% in total. Reasonable cause and absence of willful neglect can provide an exception.

The foreign-gift reporting penalty does not require a willful violation, but a reasonable-cause exception may apply.

The Important Exception: U.S. Person Decedents

An outright bequest from a U.S. person generally does not trigger the foreign-gift reporting provision solely because that person lived abroad. Separately assess whether the distribution comes from a foreign estate or trust and whether another Form 3520 reporting category applies; U.S. citizenship of the decedent is not a blanket exemption for every foreign-trust or estate transaction.

The estate may have separate U.S. estate-tax obligations. For the recipient, identify the actual donor or distributing estate or trust and the applicable reporting category.

FBAR and FATCA: What Happens After You Receive the Money

Reporting obligations do not end with Form 3520. Once you receive a foreign inheritance, two additional reporting requirements may apply depending on how and where the funds are held.

FBAR (FinCEN Form 114)

A U.S. person generally must file an FBAR if they have a financial interest in, or signature or other authority over, reportable foreign financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year. An inherited foreign bank or brokerage account may count; foreign pensions and other arrangements require their own analysis. Exceptions apply, so inheriting an asset does not automatically establish an FBAR filing duty.

• Deadline: April 15 following the reporting calendar year, with an automatic extension to October 15 without a request; check applicable disaster relief
• Filed electronically through the BSA E-Filing System (not with your tax return)
• Penalties: Nonwillful FBAR violations are measured per report under Bittner, rather than per account; applicable statutory maximums are inflation-adjusted. A reasonable-cause exception has its own requirements. Willful violations have different penalty rules, and criminal penalties may apply. A maximum is not an automatic assessment.

Determine when you acquired a reportable financial interest or signature or other authority and include the account in the applicable annual FBAR analysis. The account’s age does not remove your potential duty, and your obligation does not necessarily replace a separate estate, trust or other person’s obligation.

FATCA (Form 8938)

A specified individual required to file an income-tax return may also need Form 8938 when the total value of specified foreign financial assets exceeds the applicable threshold. For an unmarried individual living in the United States, this generally means more than $50,000 on the last day of the tax year or more than $75,000 at any time during it. Thresholds vary by filing status and qualifying residence abroad, and exceptions or duplicate-reporting rules may apply. If no income-tax return is required, Form 8938 generally is not required. It is separate from the FBAR; one does not replace the other. See the Form 8938 instructions.

Foreign Real Estate: A Common Inheritance That Creates Confusion

One possible inheritance is a family home abroad. For example, a parent in Italy, Mexico, India or the Philippines dies and leaves property to a U.S.-based child. This illustration is hypothetical; the result depends on the parties’ tax status and the actual estate or trust arrangement.

Here is what you need to know:

• Directly inherited foreign real estate may be reportable on Form 3520 when a U.S. person receives it as a bequest from a nonresident alien individual or foreign estate and the applicable related-person aggregate exceeds $100,000
• Foreign real estate is NOT reported on the FBAR — real property is not a financial account
• Foreign real estate held through an entity: The reportable asset may be the foreign entity interest, subject to Form 8938 rules and duplicate-reporting exceptions. Directly held real estate is not itself reported on Form 8938.
• Rental income from the property generally must be reported by a U.S. citizen or resident as worldwide income, usually on Schedule E, subject to allowable expenses and other rules. Substantial services or a different ownership arrangement can require other reporting.
• If you sell the property: A gain or loss may result. Inherited-property basis is generally fair market value at death, subject to alternate valuation and other exceptions. Determine the applicable basis and subsequent adjustments before calculating taxable gain or loss.

Information exchange and other enforcement tools may provide the IRS information about foreign financial assets. FATCA reporting does not establish automatic reporting of every property transfer or universal participation by all countries.

Practical Timeline: When to Engage a Tax Attorney

The ideal time to consult an international tax attorney is before you accept the inheritance — or as soon as you learn you are a beneficiary. Here is a practical timeline:

1. After learning of the inheritance: Identify the distributing person, estate or trust, your rights in the assets, valuation evidence and relevant receipt dates. Consider advice before making a transfer or distribution that you do not understand.
2. Before transferring funds to the U.S.: Preserve estate documents, valuations and bank records showing the source and ownership of the funds. A transfer’s destination does not determine whether the underlying inheritance or foreign account must be reported. Review the transaction with your adviser and financial institution; confirm any separate reporting obligations before moving funds.
3. Before the applicable filing deadline: Prepare a complete Form 3520 and any other required reports. Do not assume that an ongoing estate settlement automatically postpones reporting for property already received; evaluate receipt dates and valid extension options.
4. If you missed prior deadlines: Review the facts before choosing normal delinquent filing, the Streamlined Filing Compliance Procedures, or the IRS Voluntary Disclosure Practice. Eligibility and penalty treatment differ, and no route guarantees relief or immunity.

What Happens If You Already Missed the Filing Deadline

If you received a foreign inheritance in a prior year, review whether Form 3520, FBAR or another report was required and whether it was filed completely and on time. Gather your prior returns, account records and IRS correspondence before selecting a correction route.

The IRS offers several paths to come into compliance:

• Streamlined Filing Compliance Procedures: Eligible nonwillful taxpayers may receive specified penalty treatment only if all conditions of the applicable U.S.-resident or overseas procedure are met, including the required certification. An IRS civil examination for any year or a criminal investigation makes a taxpayer ineligible. Previous penalty assessments on earlier delinquent or amended filings are not automatically removed. Lack of knowledge alone does not establish eligibility; see our Form 3520 penalty guide.
• Voluntary Disclosure Practice (VDP): Taxpayers with willful noncompliance and potential criminal exposure may consider this IRS Criminal Investigation practice. It requires a timely, truthful and complete disclosure, cooperation and payment arrangements under the applicable rules. It does not guarantee immunity from prosecution.
• Reasonable cause: The foreign-gift reporting penalty has an exception when the failure was due to reasonable cause and not willful neglect. Explain the actual facts and supporting evidence; merely hiring a preparer or not knowing the rule does not establish relief. For a delinquent Form 3520 submitted with a reasonable-cause statement, current IRS instructions say to write “Reasonable Cause Statement attached” at the top of the first page.

Taxpayers who are not under IRS civil examination or criminal investigation and have not already been contacted about delinquent international information returns should follow the IRS normal filing procedures for those returns. Delinquent Forms 3520 and 3520-A follow their own filing instructions. A reasonable-cause statement may be attached; current IRS guidance says such statements for these forms will be considered before assessment, but relief is not guaranteed. Corrected filings do not themselves provide immunity from prosecution. See the IRS delinquent-information-return guidance.

Navigating Grief and Tax Compliance Simultaneously

Review the relevant notices, filing history, records, and deadlines before choosing a response. Evaluate professional assistance according to the facts, applicable law, and agreed scope of representation.

Keep an organized file of the will or estate documents, communications with the executor, valuations, receipt dates and foreign-account statements. These records can help distinguish inherited property from later income and identify the reports and deadlines that apply.

Protect Yourself: Take Action Now

If you have received — or expect to receive — an inheritance from a foreign family member, the most important step you can take is to understand your obligations before penalties accrue. International information-return penalties can be substantial. Applicable reporting duties, exceptions and correction procedures depend on the facts.

Contact Segal, Cohen & Landis, P.C. to discuss your foreign inheritance and U.S. reporting questions, the work needed and the scope of any proposed representation.

Request a consultation online and confirm the appropriate contact details and engagement terms.