After 32 years of IRS work — and more than $100 million in resolved tax debt — I've seen just about every version of the problem you're dealing with. I'm Darrin Mish, a tax attorney in Tampa. Here's what you should know.
Two Different Things, One Common Question
“Do I have to report foreign inheritance?” Yes, almost always. Reporting is not the same as paying tax. Most U.S. recipients of foreign inheritances owe no tax on the receipt but absolutely have to report it. The form is Form 3520, the threshold for individual donors is $100,000, and the penalty for missing it is the issue that brings most clients to my office.
What Triggers the Reporting Obligation
Three different triggers, all under IRC §6039F.
First, aggregate gifts or inheritances exceeding $100,000 received during a calendar year from a single non-resident alien individual or foreign estate. Multiple smaller transfers from the same source aggregate.
Second, aggregate gifts received during a calendar year from foreign corporations or foreign partnerships that exceed a much lower threshold – the figure is inflation-adjusted annually and has recently been around $18,000.
Third, any distribution from a foreign trust to a U.S. person, regardless of amount. This third trigger has no de minimis exception.
Form 3520 – What It Looks Like
Form 3520 is titled “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” It is a four-part form that handles multiple different international transactions in addition to foreign gifts and inheritances.
For inheritance reporting specifically, Part IV is the relevant section. You identify the donor, the relationship (typically family member), the date of the transfer, the value, and the type of property received.
The form is filed separately from your income tax return. It goes to the IRS Service Center in Ogden, Utah by the income tax return due date including extensions.
The Penalty for Missing It
Under IRC §6677, the penalty for failure to file Form 3520 timely is 5 percent of the unreported amount per month, up to a maximum of 25 percent. For substantial inheritances, this produces large penalties even though no underlying tax was owed.
The penalty is calculated against the unreported gift or inheritance amount, not against any tax. A $400,000 unreported inheritance produces a maximum penalty of $100,000, just for the failure to file an information return.
Interest also accrues on the penalty from the original due date of the form.
The Reasonable Cause Defense
Under IRC §6677(d), the penalty does not apply if the taxpayer can show the failure was due to reasonable cause and not willful neglect.
Reasonable cause in this context typically involves taxpayers who were unaware of the obligation and had no reason to know. Genuine first-time recipients of foreign inheritance who have never had international tax exposure often qualify. Taxpayers who relied on a tax preparer who never asked about foreign gifts may qualify if the reliance was reasonable.
The IRS reviews reasonable cause arguments carefully but has been more receptive to these arguments for Form 3520 inheritance penalties than for FBAR penalties. The form is genuinely obscure to taxpayers without an international tax background.
What Counts as “From a Foreign Person”
The triggering question is whether the donor or estate is foreign for U.S. tax purposes.
A non-resident alien individual is a foreign person. A foreign estate is a foreign person. A foreign corporation, partnership, or trust is a foreign entity subject to the corporate/partnership thresholds.
Dual citizens and green card holders are typically U.S. persons under §7701(b), and gifts or inheritances from them are not foreign-source for Form 3520 purposes. The donor’s tax residency, not their nationality, is what matters.
If a U.S. person inherits from another U.S. person who happens to live abroad, that is not a foreign inheritance for Form 3520 purposes. The estate may have other reporting requirements but Form 3520 does not apply.
Aggregation Across Sources
The $100,000 threshold for individual donors aggregates across multiple transfers from the same donor during the same calendar year. Three $40,000 wire transfers from the same foreign relative during the same year hit the threshold.
Different donors do not aggregate against each other for the individual-donor threshold. Receipts from a foreign parent and a foreign sibling are separate triggers and each must independently exceed $100,000.
The corporate/partnership threshold operates independently and aggregates across multiple transfers from any single foreign entity.
What If the Inheritance Stays Abroad?
The reporting obligation does not depend on whether the funds enter the United States. If you inherit a $500,000 foreign bank account and you leave the money in the foreign bank, Form 3520 still applies. The triggering event is the receipt of the inheritance, not the repatriation.
This catches many taxpayers who assume keeping money abroad keeps it out of U.S. reporting. The opposite is closer to true. Keeping it abroad keeps you in continuing FBAR and Form 8938 territory year after year, in addition to the Form 3520 for the initial receipt.
What If You Already Missed the Deadline?
Form 3520 is due with your income tax return for the year of receipt, including extensions. If that deadline has passed, the form is late and the penalty has technically started accruing.
Late filing with a reasonable cause statement attached is the standard remediation. The submission acknowledges the late filing, narrates the facts that establish reasonable cause, and requests penalty abatement. Many late Form 3520 filings are accepted without penalty under reasonable cause when the facts support it.
For taxpayers with multiple years of unreported foreign inheritances, the Streamlined Filing Compliance Procedures incorporate Form 3520 reporting and provide formal IRS acceptance of the late filings as part of the streamlined package.
After 32 Years of International Estate Cases
The Form 3520 problem is solvable in nearly every case where the taxpayer comes forward voluntarily. The reasonable cause defense is robust for genuine first-time recipients. The penalties get assessed, contested, and abated.
The cases that go badly are the ones where the taxpayer waited until the IRS asked questions. Once the IRS opens an examination, the burden shifts. Reasonable cause arguments raised after an audit notice are weaker than the same arguments raised in a voluntary late filing.
Get Help Now
If you have received a foreign inheritance and you are unsure whether you reported it correctly, or whether you reported it at all, the late filing path is generally manageable when handled correctly. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We file late Form 3520s with reasonable cause and we get the penalties abated.