Receiving an inheritance from a foreign relative or a foreign estate is not a taxable event for U.S. income tax purposes — but it is a reporting event that triggers obligations under multiple provisions of the Internal Revenue Code and the Bank Secrecy Act.

Failing to report a foreign inheritance can result in penalties of 25% to 35% of the amount received, plus potential criminal exposure for willful failures. These penalties apply regardless of whether any tax is owed.

Under IRC §102, property received as a gift or bequest is excluded from gross income. This rule applies to foreign inheritances as well as domestic ones — a U.S. person who inherits $5 million from a foreign relative does not include that amount in gross income.

However, income generated by inherited property is taxable. If the inherited property is a foreign bank account that earns interest, the interest is taxable U.S. income. If the inherited property is a foreign rental property, the rental income is taxable.

The income tax exclusion for the inheritance itself does not eliminate the reporting obligations.

Form 3520 is filed by U.S. persons who:

1. Receive a gift or bequest from a foreign person that exceeds $100,000 in a calendar year (aggregating all gifts from related foreign persons);
2. Receive a distribution from a foreign trust;
3. Are treated as the owner of a foreign trust under the grantor trust rules; or
4. Transfer property to a foreign trust.

A U.S. person who receives a bequest from a foreign estate — or a gift from a foreign individual — must file Form 3520 if the total received exceeds $100,000 in the calendar year.

The $100,000 threshold is aggregated across all gifts and bequests from related foreign persons. If a U.S. person receives $60,000 from a foreign parent and $50,000 from a foreign sibling in the same year, the total ($110,000) exceeds the threshold and Form 3520 is required.

For gifts from foreign corporations or foreign partnerships, the threshold is much lower — $17,339 (2026, indexed for inflation). Gifts from foreign corporations and partnerships are subject to heightened scrutiny because they may be disguised compensation or distributions.

Form 3520 is due on the same date as the taxpayer's income tax return, including extensions — generally April 15 (October 15 with extension) for calendar-year individual filers.

Form 3520 is filed separately from the income tax return. It is mailed to the IRS Service Center in Ogden, Utah.

The penalties for failure to file Form 3520 are severe:

• Foreign gifts and bequests: 5% of the amount of the gift or bequest per month, up to 25%;
• Foreign trust distributions: 35% of the gross value of the distribution;
• Failure to report ownership of a foreign trust: 5% of the gross value of the trust's assets.

The IRS has broad authority to assess these penalties, and the burden of proof is on the taxpayer to demonstrate reasonable cause for the failure.

If the inherited property includes a foreign financial account — a bank account, brokerage account, or other financial account held at a foreign institution — the U.S. beneficiary may be required to file an FBAR (FinCEN Form 114).

The FBAR is required when a U.S. person has a financial interest in, or signature authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year.

An inherited foreign bank account triggers FBAR reporting from the date the beneficiary acquires a financial interest in the account — even if the account is in the process of being transferred and the beneficiary has not yet received the funds.

The FBAR is filed electronically with FinCEN (not the IRS) by April 15, with an automatic extension to October 15.

Penalties for willful failure to file an FBAR can reach the greater of $100,000 or 50% of the account balance per violation. Non-willful penalties are up to $10,000 per violation.

U.S. persons with specified foreign financial assets exceeding certain thresholds must also file Form 8938 (Statement of Specified Foreign Financial Assets) with their income tax return under FATCA (IRC §6038D).

The thresholds vary by filing status and whether the taxpayer lives in the U.S. or abroad:

• Single/MFS, U.S. resident: $50,000 at year-end or $75,000 at any point during the year;
• MFJ, U.S. resident: $100,000 at year-end or $150,000 at any point;
• Living abroad: thresholds are four times higher.

Specified foreign financial assets include foreign bank accounts, foreign brokerage accounts, interests in foreign entities, and foreign financial instruments. Foreign real estate held directly (not through a foreign entity) is generally not a specified foreign financial asset for Form 8938 purposes.

The penalty for failure to file Form 8938 is $10,000, with an additional $10,000 for each 30-day period of continued failure after IRS notice, up to $50,000.

Foreign real property inherited from a foreign person is generally not subject to Form 3520 reporting (it is not a foreign financial account) and is not a specified foreign financial asset for Form 8938 purposes.

However:

• Rental income from foreign real property is taxable U.S. income and must be reported on Schedule E;
• Gain on sale of foreign real property is taxable U.S. income;
• Foreign tax credits may be available for foreign taxes paid on rental income or gain; and
• FIRPTA rules apply if the property is U.S. real property held through a foreign entity.

If the inherited property is held in a foreign trust, the reporting obligations are more complex. A U.S. beneficiary of a foreign trust must:

• Report distributions received on Form 3520;
• File Form 3520-A if the U.S. person is treated as the owner of the foreign trust under the grantor trust rules; and
• Potentially report the trust on Form 8938 if it is a specified foreign financial asset.

Foreign trusts are subject to heightened IRS scrutiny. The IRS presumes that a U.S. person who transfers property to a foreign trust intends to benefit from it, and the grantor trust rules may apply even if the U.S. person is not named as a beneficiary.

U.S. persons who failed to report foreign inheritances in prior years may be eligible for the IRS Streamlined Filing Compliance Procedures — a reduced-penalty program for non-willful failures. The streamlined procedures allow taxpayers to file amended returns and FBARs for the prior three years (six years for FBARs) and pay a reduced miscellaneous offshore penalty of 5% (for U.S. residents) or no penalty (for non-U.S. residents).

The streamlined procedures are not available for willful failures. Taxpayers who knowingly failed to report foreign accounts or inheritances face the full penalty regime and potential criminal prosecution.

Receiving a foreign inheritance is not a taxable event — but it is a reporting event with serious consequences for non-compliance. Form 3520, FBAR, and Form 8938 each have their own thresholds, deadlines, and penalty structures.

If you have received or expect to receive a foreign inheritance, contact us before the filing deadline. Our team has extensive experience with international tax reporting and can ensure that all required forms are filed correctly and on time.

Governing authority: IRC §§102, 672–679, 6038D; 31 U.S.C. §5314; FinCEN Form 114; Form 3520; Form 8938; IRS Publication 559; IRS Streamlined Filing Compliance Procedures.

Related: UK Inheritance and US Tax Reporting · FBAR Filing Guide · FBAR and FATCA Compliance for Expats