There's the version of tax resolution the late-night commercials sell you. Then there's how it actually works. I'm Darrin Mish, a Tampa tax attorney. I've spent 32 years on the inside of these cases. Here's the real version.
The Inheritance That Comes with Strings
A foreign relative dies. You inherit a bank account, an investment account, or a beneficial interest in something abroad. You have never had foreign accounts before, never filed FBARs, never thought about it. Now you have multiple U.S. reporting obligations triggered the moment you became the owner.
Inheriting a foreign account is one of the cleanest paths into international tax exposure for taxpayers who have never had any. After 32 years of estate-related international cases, I can say it accounts for a meaningful share of late-filed FBAR work.
The Three Forms That May Be Triggered
Foreign inheritance can create reporting obligations on three different forms, each with different thresholds and penalties.
FBAR (FinCEN Form 114) for the foreign financial account itself once you become the owner. The $10,000 aggregate threshold applies.
Form 3520 for the receipt of the inheritance itself if the value from a single foreign person exceeds $100,000, or for the receipt of distributions from a foreign trust regardless of amount.
Form 8938 (Statement of Specified Foreign Financial Assets) under FATCA if your aggregate foreign assets exceed the threshold – $50,000 for single filers, $100,000 for married filing jointly, with higher thresholds for taxpayers living abroad.
Each form has its own filing deadline and its own penalty structure. The same inheritance can trigger all three obligations in the same year.
Form 3520, The One Most People Miss
Form 3520 reports certain transactions with foreign trusts and the receipt of large foreign gifts and inheritances. Under IRC §6039F, U.S. persons must file Form 3520 to report aggregate foreign gifts or inheritances from non-resident aliens or foreign estates that exceed $100,000 in a calendar year.
The form is informational. There is no tax on the inheritance itself in most cases. The U.S. does not impose a tax on receipt of foreign assets, just a reporting obligation. But the penalty for missing the form is significant.
Under IRC §6677, the penalty for failure to file Form 3520 timely is 5 percent of the unreported amount per month, up to 25 percent. For larger inheritances, the penalty quickly becomes substantial. A $500,000 inheritance unreported for five months produces a $125,000 penalty.
The FBAR Side of Inheritance
When you inherit a foreign account, your FBAR clock starts the moment ownership transfers. Probate timing matters. Some jurisdictions transfer ownership immediately upon death; others require court action that takes months.
The first year you own the account, you have an FBAR obligation if the aggregate balance during your ownership period exceeded $10,000 at any point. The deceased relative’s filing obligations, if any, are separate and generally addressed through estate filings handled by the executor.
Practical issue: many heirs do not learn about the account immediately. The notification from the foreign bank arrives months later. By then, the FBAR for that year may already be late.
What Triggers the IRS Inquiry
Three common triggers.
First, FATCA reporting by the foreign bank. Once your name appears on the account, the foreign institution reports the U.S. ownership to the IRS under whatever intergovernmental agreement applies. This is automatic and often happens before you file anything.
Second, repatriation of funds. Transferring inheritance proceeds to a U.S. account triggers reporting on the U.S. side – currency transaction reports for cash, wire transfer logs for electronic movement, broker disclosure for securities.
Third, your own subsequent income tax returns. If the inherited account generates income, that income belongs on your U.S. return regardless of whether you filed the parallel information returns. A discrepancy between reported income and an undisclosed foreign account creates a clear examination signal.
The Streamlined Path for Inherited Accounts
Inherited accounts often fit the Streamlined Filing Compliance Procedures because the inheritance scenario tends to be cleanly non-willful. You did not know about the account because your relative had not told you. You did not file because you did not know there was anything to file. The non-willful certification writes itself when the facts support it.
SDOP for U.S. residents requires three years of amended returns, six years of FBARs, and a 5 percent miscellaneous offshore penalty on the highest aggregate year-end balance during the lookback period. The penalty applies to the foreign account balance, which can be substantial for inherited accounts.
SFOP for non-residents (U.S. citizens living abroad who otherwise meet the residency test) has no penalty.
The Form 3520 Penalty Abatement Angle
For Form 3520 penalties specifically, the reasonable cause defense under IRC §6677(d) is robust. Genuine ignorance of the obligation, reasonable reliance on a competent tax professional who failed to advise, or other facts establishing the taxpayer acted with ordinary care and prudence can support penalty abatement.
The IRS has been more receptive to reasonable cause arguments on Form 3520 than on FBAR for inheritance situations specifically because the form is unfamiliar to taxpayers who have never had international issues. Many courts have held that a taxpayer cannot be expected to know about a form their tax preparer never mentioned.
What Not to Do
Do not transfer the inherited funds before sorting out the reporting. Repatriation creates additional documentation trails and timing issues that make later compliance harder.
Do not assume that because the inheritance happened abroad it stays abroad. Once you own a foreign asset as a U.S. person, the U.S. reporting obligations apply regardless of where you keep the money.
Do not file the FBAR without addressing Form 3520 if the inheritance value exceeded $100,000. Filing one and missing the other still leaves you exposed on the larger penalty.
Do not delay. Each year of non-compliance compounds the problem.
Get Help Now
If you have inherited a foreign account or other foreign assets, the reporting obligations are multiple and the deadlines have likely already started. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We coordinate FBAR, Form 3520, and Form 8938 filings together so nothing gets missed.