Received a Foreign Inheritance? Your US Tax Reporting Guide

Every year, I work with clients across the country who have received an inheritance from a family member living overseas. Some of them come to me shortly after receiving the funds, unsure about their obligations. Others come to me years later, after discovering they should have filed forms they never knew existed. In both situations, the question is the same: "Do I owe taxes on this?" The short answer is usually no. A foreign inheritance is generally not taxable income under US law. But the longer answer, and the one that matters, is that the IRS imposes strict reporting requirements on anyone who receives money, property, or other assets from a foreign person or foreign estate. Missing those requirements can trigger automatic penalties starting at $10,000 per form, per violation. In this guide, I will walk you through everything you need to know about reporting a foreign inheritance, from the initial filing to the ongoing obligations that many people overlook entirely.

The Good News: Foreign Inheritances Are Generally Not Taxable

Let me start with the most common concern. If you are a US person (a citizen, green card holder, or tax resident) who has received an inheritance from someone living abroad, that inheritance is generally not considered taxable income. The United States does not impose an income tax on bequests or inheritances received by individuals. This is true whether the person who passed away was a US citizen, a foreign citizen, or a dual national.

This principle surprises many of my clients, but it has been a consistent feature of the US tax code for decades. The estate tax, when it applies, is levied on the estate of the deceased person, not on the recipient. And when the deceased person was a foreign national living abroad, their estate is typically only subject to US estate tax on US-situated assets like American real estate or US stocks, not on their worldwide assets.

So if your parent in Germany left you 200,000 euros in a bank account, that money is not taxable income to you. If your grandmother in India left you her home in Mumbai, you do not owe income tax on the value of that property at the time of inheritance. This is the good news, and it is an important starting point because many people panic unnecessarily about the tax bill.

However, there is a critical distinction between owing taxes and having reporting obligations. The IRS wants to know about these transfers. And when you fail to tell them, the penalties are severe.

Form 3520: The Primary Reporting Requirement

The most important form for anyone who has received a foreign inheritance is Form 3520, officially titled "Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts." Despite the name referencing "gifts," this form also covers bequests and inheritances from foreign persons and foreign estates.

When Form 3520 Is Required

You must file Form 3520 if you are a US person and you receive more than $100,000 in aggregate from a foreign person or foreign estate during the calendar year. This threshold applies to the total amount received, not to individual transfers. If you received $60,000 in March and another $50,000 in September from the same foreign estate, your combined total of $110,000 triggers the filing requirement.

It is also important to understand what "foreign person" means for this purpose. A foreign person includes any individual who is not a US citizen or US resident, as well as foreign corporations, foreign partnerships, foreign trusts, and foreign estates. If the estate is being administered under foreign law by a foreign executor, it is considered a foreign estate regardless of the nationality of the deceased.

Filing Deadline and Extensions

Form 3520 is due on the same date as your federal income tax return, including extensions. For most individuals, this means April 15 of the year following the calendar year in which you received the inheritance. If you file for an extension on your individual return (Form 4868), that extension also applies to Form 3520. That gives you until October 15 in most years.

One important detail: Form 3520 is filed separately from your regular income tax return. It is mailed to the IRS Service Center in Ogden, Utah, not attached to your Form 1040. Many taxpayers, and even some tax preparers who do not specialize in international returns, are unaware of this requirement.

Penalties for Non-Filing

The penalties for failing to file Form 3520 are among the harshest in the tax code. The IRS can assess a penalty of 5% of the gross amount of the foreign inheritance for each month the form is late, up to a maximum of 25%. There is a minimum penalty of $10,000.

Let me put that in real terms. If you received a $250,000 inheritance from a foreign estate and failed to file Form 3520, the IRS could assess a penalty of $12,500 per month (5% of $250,000), up to a total of $62,500 (25% of $250,000). Even if the amount was smaller, the minimum $10,000 penalty applies. That is a significant financial hit for a form that reports a non-taxable receipt.

If you have already missed a Form 3520 filing, do not wait. The sooner you address it, the more options are available. Contact my office to discuss your situation confidentially.

FBAR Requirements for Inherited Foreign Accounts

Many people who receive a foreign inheritance also inherit a foreign bank account, and this triggers a completely separate reporting obligation: the FBAR (FinCEN Form 114).

What Is the FBAR?

The FBAR, or Report of Foreign Bank and Financial Accounts, must be filed by any US person who has a financial interest in, or signature authority over, one or more foreign financial accounts if the aggregate value of those accounts exceeds $10,000 at any point during the calendar year. This is not a tax form in the traditional sense. It is filed electronically through FinCEN's BSA E-Filing System, and it is due on April 15 with an automatic extension to October 15.

How Inherited Accounts Trigger FBAR Filing

Here is where many people get caught off guard. The moment you become the legal owner of a foreign bank account through inheritance, you have a "financial interest" in that account for FBAR purposes. This is true even if the account is in probate, even if you have not yet transferred the funds to the US, and even if the account was inherited partway through the year.

Consider this scenario: your father in Italy passes away in September. He had 85,000 euros in an Italian bank account. As his sole heir, you become the legal owner of that account under Italian law. Even though you have not touched the money and the Italian probate process takes another eight months, you now have a financial interest in that account. If the combined value of all your foreign accounts (including this one) exceeded $10,000 at any point during the year, you must file an FBAR for that year.

The penalties for willful failure to file an FBAR are extraordinary. They can reach $100,000 or 50% of the account balance per violation, whichever is greater. Even non-willful penalties can run up to $10,000 per account per year. If you have missed past FBAR filings, the Streamlined Filing Compliance Procedures may offer a path to come into compliance with reduced or eliminated penalties. You can also read my guide on what to do if you have missed an FBAR deadline.

Form 8938 (FATCA): The Other Reporting Obligation

In addition to the FBAR, you may also need to file Form 8938 under the Foreign Account Tax Compliance Act (FATCA). Form 8938 is filed with your income tax return and reports specified foreign financial assets that exceed certain thresholds.

FATCA Thresholds

For individuals filing as single and living in the United States, the filing threshold is $50,000 on the last day of the tax year or $75,000 at any point during the year. For married couples filing jointly, these thresholds double to $100,000 and $150,000, respectively. If you live abroad, the thresholds are significantly higher: $200,000 on the last day of the year or $300,000 at any time for single filers.

Form 8938 covers a broader range of assets than the FBAR. In addition to bank accounts, it includes foreign stocks and securities not held in a US financial account, interests in foreign entities, and certain foreign financial instruments. If you inherited a portfolio of foreign investments or shares in a foreign company, Form 8938 may apply even if the FBAR does not cover those specific assets.

FBAR vs. Form 8938: Key Differences

I find that many clients are confused by the overlap between the FBAR and Form 8938. Here is a quick comparison. The FBAR is filed with FinCEN (not the IRS), covers only financial accounts, has a $10,000 threshold, and is filed electronically. Form 8938 is filed with the IRS on your tax return, covers financial accounts and other specified foreign financial assets, has higher thresholds ($50,000 to $200,000 depending on your filing status and residence), and is submitted on paper with your Form 1040.

In many inheritance situations, both forms are required. The two forms have different thresholds, different scopes, and different filing methods, but they are not mutually exclusive. Do not assume that filing one means you are excused from the other.

Ongoing Reporting Obligations After the Inheritance

Receiving a foreign inheritance is not always a one-time reporting event. Depending on what you inherited, you may have ongoing US tax and reporting obligations for years, or even indefinitely.

If You Keep Money in a Foreign Bank Account

If you leave your inheritance in a foreign bank account rather than transferring it to the US, you must continue to file the FBAR every year that the account balance (combined with any other foreign accounts) exceeds $10,000. You must also report the interest income earned on the account on your US tax return, as US persons are taxed on worldwide income. If the account earns more than $10 of interest in a year, the income must be reported on Schedule B of your Form 1040. Form 8938 may also remain required each year depending on the total value of your foreign assets.

If You Inherit Foreign Real Estate

Inheriting foreign real estate does not trigger an FBAR filing by itself, since real estate is not a "financial account." However, if you rent the property and deposit the rental income into a foreign bank account, that bank account would be subject to FBAR and potentially Form 8938 reporting. The rental income itself is taxable on your US return, and you would need to report it on Schedule E. If you eventually sell the property, you will owe US capital gains tax on any appreciation above your basis (typically the fair market value at the date of the decedent's death). You may be able to claim a foreign tax credit for any capital gains tax paid in the country where the property is located, but this requires careful planning.

If You Inherit an Interest in a Foreign Trust

This is one of the most complex areas I encounter. If the deceased person established a foreign trust that you now benefit from, you may be classified as a beneficiary of a foreign trust. In that case, you face annual filing obligations that include Form 3520 (to report any distributions received) and potentially Form 3520-A (the annual information return of the trust itself). If the trust does not file Form 3520-A, the IRS can impose a penalty of 5% of the value of the trust's assets attributable to you, with a minimum penalty of $10,000.

Foreign trusts are a major audit focus for the IRS, and the penalties for non-compliance are steep. If you have inherited a trust interest, I strongly recommend working with an international tax specialist who understands these rules. Schedule a consultation to review your specific situation.

If You Inherit an Interest in a Foreign Business

Inheriting ownership in a foreign corporation or partnership introduces another layer of complexity. If you own 10% or more of a foreign corporation, you may be required to file Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations). For foreign partnerships, Form 8865 may be required. Each of these forms carries penalties of $10,000 or more for failure to file.

Beyond the informational returns, owning a foreign corporation can also expose you to complex tax regimes like GILTI (Global Intangible Low-Taxed Income) and Subpart F income, which can create actual tax liability on the corporation's earnings. This is a significant departure from the general rule that inheritances are not taxable, because while the inheritance itself was not taxed, the ongoing ownership can generate taxable income year after year.

Common Scenarios: What Happens When You Inherit

Let me walk through four common scenarios I see in my practice to illustrate how these rules apply in real life.

Scenario 1: Inheriting Cash from a Foreign Parent

Maria is a US citizen living in New Jersey. Her mother, a citizen of Colombia who lived in Bogota her entire life, passes away and leaves Maria $180,000 from a Colombian bank account. Maria's brother, who lives in Colombia, transfers the money to her US bank account.

Maria's obligations: She must file Form 3520 because she received more than $100,000 from a foreign person. The $180,000 is not taxable income. If Maria's mother's Colombian bank account was ever in Maria's name during the process (for example, if Maria was listed as a joint owner during the estate settlement), Maria would also need to file an FBAR for the period of ownership. Once the money is in Maria's US account, no further foreign reporting is required for that cash.

Scenario 2: Inheriting a Foreign Property

David is a US citizen who inherits his late grandmother's apartment in Athens, Greece. The apartment is valued at approximately $320,000 at the time of her death. David decides to rent it out to tenants.

David's obligations: He must file Form 3520 to report the receipt of the property (valued above $100,000). He does not owe income tax on the inheritance. However, the rental income is taxable on his US return each year, reported on Schedule E. If he deposits the rental income into a Greek bank account, he must file an FBAR and potentially Form 8938 annually. If he eventually sells the apartment, he must report capital gains on his US return. He may need to file Greek tax returns as well, and he should coordinate the two to maximize foreign tax credits.

Scenario 3: Inheriting a Foreign Trust or Business Interest

Priya is a US resident who inherits a 30% interest in her late father's business in India, structured as a private limited company. The company has annual revenue of approximately $2 million.

Priya's obligations: She must file Form 3520 to report the receipt if the value exceeds $100,000. She must file Form 5471 annually as a US shareholder with 10% or more ownership in a foreign corporation. She may be subject to GILTI tax on the corporation's earnings. She will need to report any dividends received on her US tax return. If the business maintains bank accounts in India and Priya has signatory authority, FBAR and Form 8938 may also be required. This is one of the most complex inheritance scenarios, and getting it right from the beginning saves enormous time and money.

Scenario 4: Inheriting a Foreign Retirement or Pension Account

James is a US citizen who inherits his late father's pension account in the United Kingdom. The account holds approximately 150,000 British pounds.

James's obligations: He must file Form 3520 to report the inheritance. The pension account is a foreign financial account for FBAR purposes, so he must file the FBAR. Form 8938 likely applies as well. Distributions from the inherited pension may be taxable as ordinary income depending on the US-UK tax treaty and how the pension was structured. Some foreign pensions are treated similarly to US IRAs, while others have no US equivalent and are taxed differently. Treaty analysis is essential here. James should also consider whether the pension qualifies as a Passive Foreign Investment Company (PFIC), which could trigger Form 8621 and additional complexity.

If any of these scenarios sound familiar, reach out to my office so we can assess your reporting needs before penalties accumulate.

Common Mistakes to Avoid

Over the years, I have seen the same mistakes repeated by clients who were either unaware of the rules or received incomplete advice. Here are the most frequent errors I encounter.

Mistake 1: Not Reporting the Inheritance at All

This is by far the most common mistake. Many people assume that since a foreign inheritance is not taxable, there is nothing to report. They deposit the money into their US bank account and move on with their lives. Years later, when the IRS or their bank flags the large foreign transfer, they discover the Form 3520 requirement and face penalties of $10,000 or more. The IRS has become increasingly effective at identifying unreported foreign transfers through FATCA reporting by foreign financial institutions and information exchange agreements with other countries.

Mistake 2: Late Filing of Form 3520

Some people learn about Form 3520 after the deadline has passed. They may have filed their regular tax return on time but did not realize Form 3520 was required. Because the penalties accrue monthly (5% of the unreported amount per month), even a few months of delay can result in significant penalties. If you are in this situation, file as soon as possible and include a reasonable cause statement explaining why the form was late. In some cases, the Streamlined Filing Compliance Procedures can provide relief.

Mistake 3: Overlooking FBAR Requirements for Inherited Accounts

Many people who correctly file Form 3520 still miss the FBAR requirement. They report the inheritance but forget that the foreign bank account itself triggers a separate filing obligation. This is especially common when the inheritance sits in a foreign account for months or years while the estate is settled. Each year the account exists with your name on it, an FBAR is required.

Mistake 4: Relying on a Tax Preparer Without International Experience

International tax reporting is a specialized area. Many competent domestic tax professionals have limited exposure to forms like 3520, 5471, and 8865. I regularly work with clients who were told by their previous preparer that no additional filing was necessary for a foreign inheritance. By the time they discover the error, they are facing multiple years of missed filings. If you have foreign financial connections, make sure your tax professional has specific experience with international reporting requirements.

Mistake 5: Not Understanding Ongoing Obligations

Receiving a foreign inheritance is not always a one-and-done filing event. If you keep foreign accounts, own foreign property, or hold interests in foreign entities, you have reporting obligations every year going forward. Many people file Form 3520 in the year of the inheritance and then stop, not realizing they still need to file FBARs, Form 8938, or other international information returns annually.

Mistake 6: Failing to Establish Proper Basis in Inherited Assets

When you inherit an asset, your tax basis is generally the fair market value at the date of the decedent's death. For foreign assets, establishing this basis requires documentation: appraisals, bank statements, and valuations in the local currency, converted to US dollars at the exchange rate on the date of death. If you do not establish your basis properly at the time of inheritance, you may overpay capital gains tax when you eventually sell the asset, or you may be unable to substantiate your basis if the IRS questions your return.

How to Catch Up If You Have Missed Filings

If you are reading this and realizing you should have filed forms that you missed, do not panic. There are established procedures for coming into compliance, and in many cases, penalties can be reduced or eliminated entirely.

The IRS Streamlined Filing Compliance Procedures were designed for taxpayers whose failure to file was non-willful, meaning you did not intentionally disregard the rules. The program requires you to file three years of amended or delinquent income tax returns and six years of delinquent FBARs, along with a certification explaining why your failure was not willful. For domestic filers, there is a 5% miscellaneous offshore penalty. For those living abroad, the penalty may be zero.

I have helped dozens of clients successfully navigate the Streamlined procedures to resolve years of missed international filings. If you are a dual citizen or have been living abroad, the procedures may be especially favorable for your situation. The key is to act before the IRS contacts you, because once an audit or examination begins, the Streamlined option is no longer available.

Do not let fear of penalties keep you from coming into compliance. Book a confidential consultation and let me review your situation. Every week of delay increases the risk.

Frequently Asked Questions

Why Work with an International Tax Specialist

Foreign inheritance reporting sits at the intersection of international tax law, estate law, treaty interpretation, and financial account compliance. Getting it right requires more than just filling out a form. It requires understanding how US tax law interacts with the laws of the country where the inheritance originated, knowing which treaties apply, and structuring your compliance strategy to minimize both current penalties and future tax exposure.

At Qorri Tax, I bring over a decade of experience from top national accounting firms including Plante Moran, Grant Thornton, and Dean Dorton. I have handled foreign inheritance cases involving assets in dozens of countries, from simple cash transfers to complex multi-entity structures involving trusts, corporations, and pension accounts across multiple jurisdictions.

Whether you have just received a foreign inheritance and want to file correctly from the start, or you discovered years later that you missed required filings, I can help you navigate the process with confidence. Every client receives my personal attention, and all consultations are confidential.