The Client's Situation
Our client was a 52-year-old US-born resident living in the Chicago suburbs. In late 2021, her Swiss-born parent passed away after a long illness. During the estate settlement process, the client discovered something she had never known: her parent had maintained a substantial bank account at UBS in Zurich for decades. The account held approximately $1.2 million in a combination of cash, bonds, and investment securities.
The discovery did not end there. A few weeks later, the estate attorney in Switzerland identified a second account at Credit Suisse containing approximately $85,000. Neither account had ever been disclosed on a US tax return, an FBAR, or any other IRS filing.
The client's parent had emigrated from Switzerland to the United States in the 1970s, became a US citizen, and built a successful career in the Midwest. Throughout those decades, the parent had maintained the Swiss accounts as a connection to their homeland, using them occasionally during visits to family in Switzerland. Whether the parent was unaware of US reporting requirements or simply chose not to disclose, the result was the same: decades of non-compliance with FBAR, FATCA, and income reporting obligations.
The client had no prior knowledge of these accounts. She had never seen Swiss bank statements, never had signatory authority, and never benefited from the accounts during her parent's lifetime. Now, suddenly, she was the owner of $1.285 million in undisclosed Swiss financial accounts, and she had no idea what to do.
To compound matters, the client also had Form 3520 obligations. Any US person who receives a foreign inheritance exceeding $100,000 must report it on Form 3520. The client's inheritance of over $1.2 million triggered this requirement, and she had not filed the form.
Why This Was a Serious Problem
The client faced a convergence of multiple compliance failures, each carrying its own set of severe penalties. Here is a breakdown of the exposure:
Inherited non-compliance. When you inherit a foreign bank account, you inherit both the asset and the reporting obligations that come with it. While the client was not personally responsible for her parent's failure to disclose the accounts during the parent's lifetime, she now had her own obligations as the new account owner. Every year that she held these accounts without reporting them created new violations.
FBAR penalties. The FBAR (FinCEN Form 114) requires US persons to report foreign financial accounts when the aggregate value exceeds $10,000 at any point during the calendar year. Willful FBAR violations carry penalties of up to $100,000 per violation or 50% of the account balance, whichever is greater. With $1.285 million in accounts, the potential penalties were staggering, easily exceeding $500,000 for even a few years of non-reporting. Even non-willful penalties can reach $10,000 per account per year.
FATCA and Form 8938. Under the Foreign Account Tax Compliance Act, the client was also required to file Form 8938 to report specified foreign financial assets exceeding certain thresholds. For a single filer living in the US, the threshold is $50,000 at year-end or $75,000 at any point during the year. The client's Swiss holdings far exceeded these thresholds.
Form 3520 penalty exposure. The penalty for failing to file Form 3520 to report a foreign inheritance is 25% of the amount received. On a $1.2 million inheritance, that translates to a potential penalty of $300,000. This penalty alone could have been financially devastating.
Unreported income. The Swiss accounts had been generating interest, dividends, and investment gains for years. This income was reportable on the client's US tax return once she became the account owner. Failure to report foreign income can result in accuracy-related penalties of 20% to 75% of the underpayment, plus interest.
Swiss bank scrutiny. Since the landmark UBS prosecution in 2009 and the subsequent Swiss Bank Program, Swiss financial institutions have been under intense pressure to identify and report US account holders. The era of Swiss bank secrecy protecting US taxpayers is long over. The client's accounts were already visible to US authorities through FATCA reporting and automatic exchange of information agreements.
Time pressure. The client needed to bring these accounts into compliance before filing her next annual tax return. Every day of delay increased her exposure and potentially weakened her case for non-willful conduct.
Understanding the Key Compliance Requirements
Before diving into the resolution, it helps to understand the specific forms and obligations involved in a case like this.
Form 3520 and foreign inheritances. Form 3520 is an informational return that US persons must file when they receive a foreign inheritance or gift exceeding $100,000. This is a critical distinction: the inheritance itself is generally not subject to US income tax. The US does not tax inherited assets. However, the IRS requires the informational reporting, and the penalty for failing to file is 25% of the gross amount received. Many taxpayers are shocked to learn that an informational return, one that does not result in any tax due, can carry a penalty of hundreds of thousands of dollars.
The difference between the parent's non-compliance and the client's obligations. The parent's estate may face its own penalties for decades of non-reporting. That is a separate matter handled through the estate administration process. The client's own obligations began when she acquired ownership of the Swiss accounts. Her compliance failures were limited to the period after the inheritance, which was relatively short. This distinction is important because it directly affects the non-willfulness analysis.
How SDOP addresses inherited non-compliance. The Streamlined Domestic Offshore Procedures are designed for US residents who have non-willfully failed to report foreign financial accounts and pay the associated tax. The program requires filing three years of amended returns and six years of delinquent FBARs, along with a certification of non-willful conduct. The penalty is 5% of the highest aggregate balance of unreported foreign accounts during the six-year FBAR period. Critically, SDOP can also cover related information return penalties, including Form 3520 penalties.
The Approach
After a thorough initial consultation, we determined that the Streamlined Domestic Offshore Procedures were the best path forward for this client. The client clearly qualified: she was a US resident, her non-compliance was non-willful, and she had not been contacted by the IRS regarding the Swiss accounts.
Our approach involved several interconnected workstreams:
1. Establishing non-willfulness. The foundation of any SDOP submission is the non-willfulness certification. In this case, the client's non-willfulness argument was exceptionally strong. She had no knowledge whatsoever of the Swiss accounts prior to her parent's death. She had never seen bank statements, never had signatory authority, and never received any income from the accounts. Her parent had never mentioned the accounts. The client's discovery of the accounts came through the Swiss estate attorney during the probate process. We documented this timeline carefully, including correspondence from the Swiss banks, estate documents, and the client's own sworn statements.
2. Coordinating with Swiss banks. We worked with UBS and Credit Suisse (which had been acquired by UBS by the time of our engagement) to obtain complete account statements going back six years. Swiss banks are generally cooperative with US compliance efforts, but the process requires patience and proper authorization. We obtained detailed records of all account activity, including interest, dividends, capital gains, and fees, denominated in both Swiss francs and US dollars.
3. Preparing amended tax returns. We prepared three years of amended US income tax returns (Forms 1040-X) to report the previously unreported Swiss account income. This included interest on Swiss franc-denominated bonds, dividends from European equity holdings within the UBS portfolio, and realized capital gains from securities transactions. We also claimed foreign tax credits for Swiss withholding tax (Verrechnungssteuer) that had been withheld on interest and dividends. Switzerland imposes a 35% withholding tax on certain investment income, and US taxpayers can claim a credit for this tax on their US returns.
4. Filing delinquent FBARs. We prepared and filed six years of delinquent FBARs (FinCEN Form 114) reporting both Swiss accounts. Each FBAR required the account number, name and address of the Swiss bank, the maximum account value during the calendar year, and the type of account. We converted all Swiss franc balances to US dollars using the Treasury Department's official exchange rates.
5. Filing Form 3520. We prepared and filed Form 3520 to report the foreign inheritance. The form required detailed information about the deceased parent, the relationship, the amount inherited, and the foreign financial institution. Because we were filing this under the SDOP umbrella, the 25% late-filing penalty was subject to abatement.
6. Reviewing the parent's estate obligations. While the client's own compliance was our primary focus, we also reviewed the parent's estate tax return (Form 706) to ensure that the Swiss accounts were properly included in the estate. We assessed whether any foreign trust structures were involved that might trigger Form 3520-A obligations for the estate.
7. Calculating the SDOP penalty. The 5% SDOP penalty is calculated on the highest aggregate balance of all unreported foreign financial accounts during the six-year FBAR look-back period. We carefully reviewed account statements for each year to identify the year with the highest combined balance. The highest aggregate balance was $1,285,000, which occurred in the year of inheritance when both the UBS and Credit Suisse accounts were at their peak values.
The Resolution
The SDOP submission was accepted by the IRS without further inquiry. Here is the complete financial breakdown:
SDOP penalty: 5% of the highest aggregate balance of $1,285,000, resulting in a penalty of approximately $64,250. While this was a substantial amount, it represented a fraction of the potential exposure under standard penalty provisions.
Form 3520 penalty: Because the SDOP procedures cover related information return penalties, the Form 3520 late-filing penalty (which could have been 25% of $1.2 million, or $300,000) was abated. This single abatement saved the client roughly $300,000.
Additional US tax: The unreported Swiss interest, dividends, and investment gains resulted in approximately $12,400 in additional US tax across three amended returns. This figure was partially offset by foreign tax credits of approximately $4,200 for Swiss withholding tax (Verrechnungssteuer) that had been withheld at source.
Parent's estate: A separate analysis was completed for the parent's estate. The estate tax return was reviewed and amended to properly include the Swiss accounts. The estate's own compliance issues were handled through a separate process.
The Outcome
The resolution gave the client complete peace of mind. She was now in full compliance with all US reporting requirements for her Swiss accounts. Specifically:
- Form 3520 penalty was fully abated through the SDOP process
- The client now properly reports her Swiss accounts on annual FBARs and Form 8938
- All Swiss account income is reported on her annual US tax return with appropriate foreign tax credits
- An investment strategy review was completed to optimize the tax efficiency of the Swiss holdings
- The client chose to maintain her Swiss accounts (there is no obligation to close them) with proper ongoing compliance
The total cost to resolve this matter was approximately $76,650, plus professional fees. Compare that to the potential exposure: $500,000+ in FBAR penalties, $300,000 in Form 3520 penalties, accuracy-related penalties on unreported income, and potential criminal referral risk. The SDOP process saved the client well over $700,000 in potential penalties.
Key Takeaways
Inheriting a Foreign Account Means Inheriting Reporting Obligations
When you inherit a foreign bank account, you become responsible for all US reporting requirements going forward. This includes FBARs, Form 8938, and income reporting. You do not, however, automatically inherit the prior owner's penalties for their own non-compliance. The distinction is critical.
Form 3520 Is Required for Foreign Inheritances Over $100,000
The penalty for failing to file Form 3520 is 25% of the inherited amount. For large inheritances, this penalty alone can be financially devastating. Filing through SDOP may allow the penalty to be abated entirely.
SDOP's 5% Penalty Is Dramatically Lower Than Standard Penalties
The SDOP penalty calculator can help you estimate your potential penalty. In this case, the 5% penalty was roughly one-tenth of what the client would have faced under standard FBAR penalty provisions.
Swiss Bank Secrecy No Longer Protects US Taxpayers
Since FATCA implementation and the Swiss Bank Program, Swiss financial institutions automatically report US account holders to the IRS. Voluntary disclosure is far preferable to waiting for the IRS to contact you.
Non-Willfulness Is Strong When You Didn't Know Accounts Existed
Clients who discover inherited foreign accounts have a particularly strong non-willfulness argument. If you genuinely had no knowledge of the accounts prior to the inheritance, that fact powerfully supports a non-willful certification.
Acting Quickly Is Critical
Once you discover inherited foreign accounts, every day counts. Prompt action demonstrates good faith and strengthens your non-willfulness position. Delays can be interpreted as willful blindness.
Frequently Asked Questions
What US tax forms do I need to file if I inherit a foreign bank account?
If you inherit a foreign bank account, you may need to file several forms. FinCEN Form 114 (FBAR) is required if the aggregate value of all your foreign accounts exceeds $10,000 at any point during the year. Form 8938 is required if your foreign financial assets exceed certain thresholds (for example, $50,000 at year-end for a single filer living in the US). Form 3520 must be filed to report the foreign inheritance itself if the value exceeds $100,000. You will also need to report any income earned in the inherited account, including interest, dividends, and capital gains, on your regular tax return. If the account holds foreign mutual funds, Form 8621 (PFIC) may also be required.
Can I be penalized for my parent's failure to report a foreign account?
Generally, you are not personally liable for your parent's failure to report their own foreign accounts during their lifetime. However, you inherit the obligation to report accounts that you now own or have beneficial interest in. If your parent's estate has unfiled returns or unreported accounts, the estate itself may face penalties. As the heir, your own compliance obligations begin when you acquire ownership or signatory authority over the inherited accounts. The key is to act quickly after discovering inherited foreign accounts to minimize your own exposure.
What is Form 3520 and when is it required?
Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) is required when a US person receives a foreign inheritance or gift exceeding $100,000 in value. This is an informational return, meaning the inheritance itself is generally not taxable. However, the penalty for failing to file or filing late is 25% of the amount of the foreign inheritance. For a $1 million inheritance, that penalty would be $250,000. When filed through the Streamlined Domestic Offshore Procedures, the Form 3520 late-filing penalty can often be abated.
How is the SDOP penalty calculated on an inherited account?
The SDOP penalty is 5% of the highest aggregate balance of all unreported foreign financial accounts during the six-year FBAR look-back period. For inherited accounts, the full inherited balance is included in this calculation from the date you acquired ownership or beneficial interest. The calculation looks at the combined balance of all unreported foreign accounts across all six years and identifies the single highest balance. You can estimate your potential penalty using our SDOP penalty calculator.
Do I need to close an inherited Swiss bank account?
No. There is no legal requirement to close an inherited foreign bank account. You are free to maintain the account as long as you meet all US reporting obligations going forward. This includes filing annual FBARs, Form 8938 if applicable, and reporting all account income on your US tax return. Many clients choose to keep their inherited Swiss accounts and simply ensure full compliance. Others prefer to transfer funds to US-based accounts for convenience. The decision is entirely personal and financial, not a legal requirement.
What if I discover my deceased parent had undisclosed foreign accounts?
If you discover that a deceased parent had undisclosed foreign accounts, you should consult an international tax specialist immediately. You will need to address two separate issues: the parent's estate obligations (which may include amending estate tax returns and filing delinquent information returns for the estate) and your own obligations as the new account holder. If you are a US resident, the Streamlined Domestic Offshore Procedures may be an effective path to resolve your own non-compliance. The critical factor is acting promptly. Delays can undermine a non-willfulness argument and increase your exposure.