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 is both deeply personal and surprisingly complex from a U.S. tax perspective. If you are a U.S. citizen, green card holder, or resident who meets the substantial presence test, the IRS expects you to report certain foreign inheritances — even though the inheritance itself is generally not subject to U.S. income tax.

The distinction matters: you typically owe no federal income tax on the inheritance itself, but you must report it if it came from a nonresident alien (NRA) and exceeded $100,000 in value during the tax year. Failure to report triggers automatic penalties that can reach tens of thousands of dollars — and that is where most people run into trouble.

At Segal, Cohen & Landis, P.C. (SCL), we work with clients who discover these obligations months or even years after receiving a foreign inheritance. The good news: there are clear paths to compliance, even if you are late. This guide explains what you need to know.

Form 3520: The Core Reporting Requirement

The IRS treats an inheritance from a foreign person as a type of foreign gift for reporting purposes. If you receive more than $100,000 in aggregate from a nonresident alien individual or a foreign estate during a single tax year, you must file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).

Key Details About Form 3520 for Inheritances

• Threshold: The $100,000 threshold applies to the aggregate value of gifts and bequests from all NRA individuals and foreign estates during the tax year. You cannot split an estate distribution among multiple family members to stay below the threshold — the IRS uses a related parties aggregation rule that combines amounts from related donors.
• Deadline: Form 3520 is due on April 15 of the year following the tax year in which you received the inheritance. Extensions are available by filing Form 4868 (individual return extension).
• Penalty for failure to file: The initial penalty is 25% of the amount of the foreign gift or bequest that was not reported. Additional monthly penalties of 5% can apply, up to a maximum of 25% more — meaning total penalties can reach 50% of the unreported amount.

These penalties are automatic. The IRS does not need to prove willfulness or intent — simply failing to file triggers them.

The Important Exception: U.S. Person Decedents

If the person who left you the inheritance was themselves a U.S. person — even if they were living abroad at the time of death — no Form 3520 is required for the recipient. This exception surprises many clients. A U.S. citizen living in Paris who passes away and leaves you $500,000 does not trigger a Form 3520 obligation for you, because the decedent was a U.S. person.

However, the estate itself may still have U.S. estate tax obligations. The key question for the recipient is always: Was the decedent a nonresident alien?

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)

If your foreign inheritance includes financial accounts — a bank account in your parent’s country, a brokerage account, or even a foreign pension — and the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR.

• Deadline: April 15 (automatically extends to October 15 — no request needed)
• Filed electronically through the BSA E-Filing System (not with your tax return)
• Penalties: Non-willful violations carry penalties up to Non-willful violations carry penalties up to 0,000 (adjusted annually for inflation) per annual report, not per account. Willful violations can reach the greater of $100,000 or 50% of the account balance — plus potential criminal penalties

Many clients who inherit foreign accounts do not realize they now have an FBAR obligation. The inherited account may have existed for decades, but the moment you have a financial interest or signature authority, the reporting duty shifts to you.

FATCA (Form 8938)

If your foreign financial assets exceed certain thresholds ($50,000 on the last day of the year or $75,000 at any point during the year for single filers living in the U.S.), you must also file Form 8938 with your income tax return. This requirement exists alongside the FBAR — they are not interchangeable.

Foreign Real Estate: A Common Inheritance That Creates Confusion

One of the most common scenarios we see involves inheriting a family home abroad. A parent in Italy, Mexico, India, or the Philippines passes away, and their U.S.-based child inherits the property.

Here is what you need to know:

• The inheritance of foreign real estate itself is reported on Form 3520 if it comes from an NRA and the value exceeds $100,000
• Foreign real estate is NOT reported on the FBAR — real property is not a financial account
• Foreign real estate IS reported on Form 8938 if it is held through a foreign entity (trust, corporation, partnership) — but NOT if held directly in your name
• Rental income from the property IS taxable in the U.S. as worldwide income, reported on Schedule E
• If you sell the property, capital gains apply — and your cost basis is the fair market value at the date of the decedent’s death (stepped-up basis), not the original purchase price

Many clients assume that because the property is overseas, the IRS cannot track it. This is no longer true. Automatic exchange of information agreements between the U.S. and over 100 countries mean that foreign bank transactions, property transfers, and financial activity are increasingly visible to the IRS.

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. Immediately after learning of the inheritance: Consult with an attorney to understand your reporting obligations. Do not transfer any funds until you know the rules.
2. Before transferring funds to the U.S.: Large wire transfers from foreign accounts to U.S. bank accounts can trigger Bank Secrecy Act reports and IRS scrutiny. Your attorney can help you structure the transfer properly.
3. Before the April 15 filing deadline: Ensure Form 3520 is prepared and filed on time. If the estate settlement is ongoing, discuss extension options.
4. If you missed prior deadlines: The IRS Voluntary Disclosure Program and Streamlined Filing Compliance Procedures may be available to bring you into compliance with reduced penalties.

What Happens If You Already Missed the Filing Deadline

If you received a foreign inheritance in a prior year and did not file Form 3520 or FBAR, you are not alone. Many U.S. persons discover these requirements years after the fact — sometimes during the preparation of a subsequent tax return, or after reading about enforcement actions in the news.

The IRS offers several paths to come into compliance:

• Streamlined Filing Compliance Procedures: Available if your failure was non-willful (you did not know about the requirement). Penalties are significantly reduced — in many cases, the Form 3520 penalties can be eliminated entirely through the streamlined process.
• Voluntary Disclosure Program (VDP): For clients where willfulness may be an issue, the VDP provides a structured path to disclose past non-compliance in exchange for avoiding criminal prosecution.
• Reasonable cause defense: If you can demonstrate reasonable cause for the failure to file (e.g., reliance on a tax professional who did not advise you of the requirement), penalties may be abated.

⚠️ Do not attempt a “quiet disclosure” — simply filing corrected returns for prior years without going through a formal program. The IRS has explicitly warned that quiet disclosures increase audit risk and can result in full penalties and potential criminal referral.

Navigating Grief and Tax Compliance Simultaneously

We understand that dealing with tax forms is the last thing on your mind when you are grieving the loss of a family member. Our clients often come to us feeling overwhelmed — caught between managing an estate in a foreign country, navigating a different legal system, and trying to understand U.S. tax obligations they never knew existed.

That is exactly why early engagement with a qualified international tax attorney matters. We handle the complexity so you can focus on what matters most. Our team at SCL Tax Law has guided hundreds of clients through foreign inheritance reporting — from straightforward Form 3520 filings to complex multi-country estates involving trusts, real estate, and financial accounts across multiple jurisdictions.

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. The IRS penalty structure for international information returns is severe and automatic, but compliance is straightforward when handled correctly from the start.

Contact Segal, Cohen & Landis, P.C. today for a confidential consultation about your foreign inheritance and U.S. tax reporting obligations. Whether you are planning ahead or need to correct past non-compliance, our experienced international tax attorneys are ready to help.

Call us at (617) 857-7500 or schedule a consultation online.