Do I Need to Report Foreign Inheritance to the IRS?

Reporting a foreign inheritance to the IRS is required once the total you receive from a nonresident individual or foreign estate exceeds $100,000 in a single year, even though the inheritance itself is usually not taxable income. The report goes on Form 3520. Depending on where the inherited assets sit and what they are, you may also need to file an FBAR and Form 8938. The tax bill on an inheritance from abroad is often zero; the penalties for skipping the paperwork are not.

Is a Foreign Inheritance Taxable?

Money or property you inherit from a foreign person is not counted as gross income on your federal tax return. The IRS treats a bequest from a nonresident alien or a foreign estate essentially the same as a domestic inheritance for income tax purposes: the principal is excluded from income.¹ Any U.S. estate tax falls on the estate itself, not on you, and the federal government generally cannot reach a foreign estate unless the deceased owned property physically located in the United States.

The tax-free treatment ends when the assets start producing income. Interest on cash you deposit in a U.S. bank, dividends from foreign stocks you now own, and rent from inherited overseas property all go on your return like any other income.²

One narrow exception on the inheritance itself: if the person who left you the assets was a “covered expatriate” (someone who renounced U.S. citizenship or gave up a green card and met certain income, net worth, or tax compliance thresholds), a separate tax under Section 2801 may apply. If your benefactor was a former U.S. citizen or long-term resident, get professional advice before assuming the bequest is tax-free.²

The $100,000 Reporting Threshold

Under IRC Section 6039F, you must disclose gifts or bequests from nonresident alien individuals or foreign estates once the total exceeds $100,000 during the tax year.² A separate, lower threshold applies to amounts received from foreign corporations or foreign partnerships; that figure is adjusted annually and is listed in the current year’s Form 3520 instructions.

The $100,000 is not per transfer. It covers the aggregate of everything you received from the same foreign person, or from related persons, across the entire year. “Related” is defined broadly and includes family members (siblings, parents, grandparents, children, and spouses of those relatives) and any corporation in which the donor owns more than 50% of the stock. If a foreign uncle sends you $60,000 and a corporation he controls sends another $50,000, the two combine to $110,000 and you must file. If you know or have reason to know that senders are related or that one is acting as a nominee for another, the IRS expects you to add them together.³

Filing Form 3520

Form 3520, “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts,” is the main document the IRS uses to track large inflows of foreign wealth. Gifts and bequests from foreign persons go on Part IV. You will need the date the assets were received, a description of the property, and its fair market value at the time of transfer.⁴

The form is due April 15 for calendar-year taxpayers, the same day as your regular return. If you file an extension for your income tax return, the Form 3520 deadline extends too, but no later than October 15, even if you qualify for a further discretionary extension on the 1040. U.S. citizens living abroad who receive the automatic two-month extension to June 15 for their income tax return do not get that extra time for Form 3520.⁵

Form 3520 is mailed to a designated IRS service center listed in the instructions, not to the address where you send your 1040. It is a standalone submission, not an attachment.

FBAR: If You Now Hold Foreign Bank Accounts

Inheriting foreign assets often means you now have a financial interest in bank or brokerage accounts overseas. If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file FinCEN Form 114, better known as the FBAR.⁶ The requirement applies even if the account holds inherited money you have not yet moved to the United States.

The FBAR is filed electronically through FinCEN’s BSA E-Filing System. It does not go to the IRS and is not attached to your tax return.⁷ You provide the names on each account, account numbers, the name and address of each foreign institution, and the maximum value held during the calendar year. The deadline is April 15, with an automatic extension to October 15 if you miss it.

Form 8938: FATCA Reporting

The Foreign Account Tax Compliance Act adds another layer if your foreign financial assets cross its thresholds. If you are single or filing separately and live in the United States, you must file Form 8938 when your specified foreign financial assets exceed $50,000 at year-end or $75,000 at any point during the year. If you live abroad, the year-end threshold rises to $200,000.⁸

Form 8938 covers more than the FBAR. In addition to bank accounts, it reaches stock issued by foreign corporations, interests in foreign entities, and any financial instrument or contract with a foreign counterparty. Unlike the FBAR, Form 8938 is attached to your annual income tax return.⁸

There is one useful overlap. If you already report all your specified foreign financial assets on Form 3520 (or certain other international information returns) and file them on time, you do not repeat that information on Form 8938. You fill in your name and taxpayer identification number and complete Part IV to cross-reference the other forms.⁹

Penalties for Missing or Late Filings

The penalties in this area are large relative to the actual tax owed, which is often zero. That mismatch is where real financial damage happens to people who inherit from abroad and assume no paperwork is required.

Form 3520

If you fail to report a foreign gift or bequest on Part IV, the IRS can assess 5% of the unreported amount for each month the return is late, up to a maximum of 25%.¹⁰ On a $500,000 inheritance, that is $25,000 per month, capping at $125,000. The IRS can also unilaterally determine the income tax consequences of the receipt if you give them no information to work with.¹

Form 8938

Failing to file a complete and correct Form 8938 carries an initial penalty of $10,000. If you still have not filed 90 days after the IRS sends a notice, an additional $10,000 accrues for each 30-day period of continued non-compliance, up to $50,000.¹¹

FBAR

Non-willful FBAR violations can result in a penalty up to $10,000 per account per year. If the IRS finds the violation was willful, the penalty jumps to the greater of $100,000 or 50% of the account balance at the time of the violation, and criminal penalties are possible. Filing the FBAR is not optional just because Form 8938 covers similar ground; the two forms go to different agencies and neither substitutes for the other.⁹

Cost Basis When You Sell Inherited Assets

When you eventually sell inherited property, whether foreign real estate, stock, or other assets, you need a cost basis to calculate capital gain or loss. The general rule is the same as for domestic inheritances: your basis is the fair market value of the property on the date the person died.¹² This stepped-up basis can significantly reduce your taxable gain if the asset appreciated during the decedent’s lifetime.

Getting a reliable valuation is the practical challenge. For foreign real estate, you will likely need an appraisal from a qualified professional in the country where the property sits, converted to U.S. dollars at the exchange rate on the date of death. For foreign securities, use the market price on the date of death. If the foreign estate filed an estate tax return with the IRS (Form 706), beneficiaries may receive a Schedule A from Form 8971 documenting the estate tax value, and you are generally required to use that figure as your basis.¹²

One exception: if you or your spouse originally gave the property to the decedent within one year before their death and it had appreciated, you do not get the stepped-up basis. Your basis is the decedent’s adjusted basis immediately before death.¹²

If the Inheritance Comes Through a Foreign Trust

If your inheritance arrives through a foreign trust rather than directly from an individual or estate, the reporting shifts. Distributions from a foreign trust to a U.S. person are reported on Part III of Form 3520, not Part IV.⁵ The tax treatment is also different: trust distributions can carry taxable income with them, whereas a direct bequest typically does not.

If you are treated as the U.S. owner of a foreign trust under the grantor trust rules (IRC Sections 671 through 679), the trust must also file Form 3520-A. If the foreign trustee will not file it, you must file a substitute Form 3520-A and attach it to your own Form 3520.⁵ Foreign pensions can add complexity, since a foreign retirement account may itself be classified as a foreign trust. Canadian Registered Retirement Savings Plans are explicitly excluded from the Form 3520 requirement in the instructions; most other foreign pensions are not.

If You Already Missed the Deadline

If you have already received a foreign inheritance and did not file the required forms, the IRS offers delinquent international information return submission procedures. You can use them if you are not currently under civil examination or criminal investigation and the IRS has not already contacted you about the missing returns.¹³

The process is straightforward: file the delinquent forms through normal procedures and attach a reasonable cause statement explaining why you filed late. Not knowing about the requirement is not automatically disqualifying, but you have to show the failure was not due to willful neglect. The IRS reviews these on a case-by-case basis, and the reasonable cause statement is your primary tool for requesting penalty abatement.¹³ The delinquent procedures are only available before the IRS initiates contact, and the statute of limitations for international information returns does not begin to run until you actually file the form. If you never file, the IRS can assess penalties indefinitely.

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Internal Revenue Service. Gifts From Foreign Person
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Internal Revenue Service. Instructions for Form 3520
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Internal Revenue Service. Instructions for Form 3520
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Internal Revenue Service. About Form 3520
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Internal Revenue Service. Foreign Trust Reporting Requirements and Tax Consequences
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Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
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Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts
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Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers
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Internal Revenue Service. Instructions for Form 8938
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Office of the Law Revision Counsel. 26 USC 6039F – Notice of Large Gifts Received From Foreign Persons
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Internal Revenue Service. Instructions for Form 8938 – Section: Penalties
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Internal Revenue Service. Basis of Assets
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Internal Revenue Service. Delinquent International Information Return Submission Procedures