Is Foreign Inheritance Taxable? Form 3520, FBAR, and Penalties

A foreign inheritance is not taxable as U.S. income. Section 102 of the Internal Revenue Code excludes property received by gift, bequest, or inheritance from gross income, and that exclusion applies whether the person who left you the money lived in the United States or somewhere else.¹ The tax bill people worry about isn’t the real risk. The real risk is paperwork: the IRS requires disclosure of foreign inheritances above $100,000, and missing that filing can cost up to 25 percent of what you received.²

Why the Inheritance Itself Isn’t Income

The federal government taxes estates, not heirs. An estate tax falls on the total value of a deceased person’s property before anyone inherits it. An inheritance tax falls on the person who receives the property. The U.S. imposes an estate tax and has never imposed a federal inheritance tax.³

When a non-resident foreign person dies, U.S. estate tax generally reaches only property situated in the United States. Assets held entirely in another country fall outside that net. On your side as the heir, Section 102 keeps the inherited amount out of your gross income.¹ There is no line on your 1040 where you report the principal as earnings, and you owe no income tax on it, however large the amount.

Where Tax Still Applies

The Section 102 exclusion has edges. The inherited property is tax-free, but any income it generates after you receive it is fully taxable. Interest from an inherited foreign bank account, dividends from inherited stock, and rental income from inherited real estate all go on your return the same way domestic income would.¹

Then there is income in respect of a decedent. If the person who died had earned income they hadn’t yet received or been taxed on, that income doesn’t escape taxation because it passed through an estate. Common examples: unpaid salary, accrued interest or dividends, and distributions from retirement accounts. A foreign pension the decedent never drew down creates a taxable event when the distribution reaches you, even though the underlying bequest isn’t taxed.

Foreign life insurance follows the same rule as domestic policies. A death benefit paid to a named beneficiary is excluded from gross income.⁴ Interest accumulating on those proceeds after the insured’s death is taxable and has to be reported.

The $100,000 Reporting Rule: Form 3520

If the total value of what you receive from a foreign person or foreign estate exceeds $100,000 in a single tax year, you must file IRS Form 3520.⁵ It’s an information return, not a tax payment. The IRS wants to know the money arrived. The threshold is aggregate: multiple distributions from the same foreign estate during the year that together cross $100,000 trigger the filing.

The form asks for the date or dates you received each distribution, a description of the property (cash, securities, real estate, or other assets), the fair market value in U.S. dollars, and the identity of the source — individual, estate, corporation, or partnership. Misidentifying the source can cause the IRS to treat the transfer as taxable business income. Formal appraisals aren’t required in every case, but the Form 3520 instructions expect you to keep contemporaneous records supporting a good-faith valuation.⁶ For inherited real estate or closely held business interests, a professional appraisal is the safest documentation.

Form 3520 is due on the 15th day of the fourth month after the end of your tax year, which is April 15 for most individuals. An extension of your income tax return on Form 4868 automatically extends Form 3520 to October 15.⁵ The form is filed as a standalone document, mailed separately from your 1040. Send it by certified mail; the IRS does not send a confirmation receipt.

For currency conversions, use the U.S. Treasury Reporting Rates of Exchange, the authoritative source for converting foreign-denominated assets to U.S. dollars on your filings.⁷ Use the rate on the date of receipt for Form 3520 reporting.

Penalties and the Late-Filing Safety Valve

The penalty for failing to report is 5 percent of the unreported amount for each month the return is late, capped at 25 percent of the inheritance.² On a $500,000 inheritance, that cap is $125,000. The IRS can also independently determine the tax consequences of the transfer, which could reclassify it in a way that does trigger tax.

A reasonable cause exception exists. If you can show the failure was not due to willful neglect, the penalty does not apply.² The IRS has said that a foreign country’s restrictions on disclosing financial information do not qualify, and neither does a foreign trustee’s reluctance to hand over records.⁶ You are expected to get the information anyway.

If you missed the filing in a prior year and the IRS hasn’t contacted you, the Delinquent International Information Return Submission Procedures may let you file late without penalty. You must not be under examination or criminal investigation, and the IRS must not have already reached out about the missing return.⁸ File the delinquent return through normal procedures with a reasonable cause statement attached. That option disappears the moment the IRS contacts you first.

Distributions From a Foreign Trust: No Threshold

If the money comes through a foreign trust rather than directly from a foreign estate, the rules are stricter. Every distribution from a foreign trust gets reported on Part III of Form 3520, regardless of amount. There is no $100,000 threshold; even a $1,000 payment triggers the filing.⁶

“Distribution” is defined broadly. It includes cash, the fair market value of property, loans of cash or marketable securities from the trust, and the uncompensated use of trust property such as living in a trust-owned home rent-free.⁶ If you are treated as the owner of any portion of a foreign trust under the U.S. grantor trust rules, the trust itself must file Form 3520-A, its own annual information return. If the foreign trustee refuses, you have to attach a substitute Form 3520-A to your own Form 3520 to avoid additional penalties.⁹

Ongoing Reporting Once You Hold the Assets Abroad

Form 3520 is a one-time filing tied to the year you received the inheritance. If the money stays in a foreign account, you pick up annual reporting obligations for as long as you hold it.

FBAR (FinCEN Form 114)

If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file a Report of Foreign Bank and Financial Accounts. It’s due April 15 with an automatic extension to October 15, and it’s filed electronically through FinCEN’s BSA E-Filing System, not with your tax return. Keep records of each account — name, account number, bank name and address, type, and maximum value — for at least five years from the FBAR due date.¹⁰

The $10,000 threshold is cumulative. If two accounts together briefly exceeded $10,000 for a single day, both must be reported for the entire year.¹¹ The requirement also reaches signature authority over an account you don’t own, which comes up when heirs are named signatories during estate administration.

Civil penalties for non-willful FBAR violations are $16,117 per violation as of the most recent inflation adjustment.¹² Willful violations carry the greater of $100,000 or 50 percent of the account balance, and criminal prosecution is possible for deliberate concealment.

Form 8938 (FATCA)

The Foreign Account Tax Compliance Act adds a separate requirement through Form 8938, filed as an attachment to your income tax return. For single filers living in the U.S., the thresholds are foreign financial assets exceeding $50,000 on the last day of the tax year or $75,000 at any time. For married filing jointly in the U.S., the numbers are $100,000 and $150,000. Filers living abroad have higher thresholds.¹³

Form 8938 and the FBAR are separate requirements with different thresholds, different filing methods, and different penalty structures. Filing one does not satisfy the other.¹¹ The penalty for missing Form 8938 starts at $10,000, with up to $50,000 more if you still haven’t filed after the IRS notifies you, plus a 40 percent penalty on any tax understatement connected to undisclosed foreign assets.¹³

Cost Basis When You Eventually Sell

Even though the inheritance isn’t income, you need to know its tax basis for the day you sell. Under Section 1014, inherited property generally receives a stepped-up basis equal to the fair market value on the date of the decedent’s death.¹⁴ The rule covers property acquired by bequest, devise, or inheritance, and it isn’t limited to domestic decedents.

If you inherit foreign real estate worth $300,000 on the date of death and later sell it for $350,000, you owe capital gains tax only on the $50,000 gain. Getting the valuation right at the time of inheritance matters, because an understated basis means overpaying capital gains tax later. Keep appraisals, bank statements, and any estate valuation documents from the foreign proceedings.¹⁵ Use the Treasury exchange rate on the date of death when converting the basis figure.

Inherited Foreign Mutual Funds: The PFIC Problem

One of the harshest surprises in international tax involves inheriting shares in a foreign mutual fund. Most foreign mutual funds qualify as Passive Foreign Investment Companies. If you inherit PFIC shares and later sell them or receive certain distributions, the gain or excess distribution is spread across your entire holding period and taxed at the highest individual rate for each year, with an interest charge stacked on top.¹⁶

You must file Form 8621 for each PFIC in any year you receive a distribution, recognize a gain on sale, or are otherwise required to report under Section 1298(f).¹⁶ Certain elections, such as the deemed-sale election or the qualified electing fund election, can reset your holding period and reduce the tax hit, but the calculations are complex. This is the one area of foreign inheritance where professional tax advice is close to essential. The wrong move with a PFIC can create a tax bill larger than the value of the shares.

State Inheritance Taxes

Federal law is only half the picture. Five states impose their own inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa was previously on the list but eliminated its tax for deaths on or after January 1, 2025.¹⁷ Rates depend on your relationship to the deceased. Spouses are typically exempt, children and close family pay lower rates, and distant relatives and unrelated beneficiaries can face rates as high as 15 or 16 percent.

Whether a state’s tax reaches foreign assets depends on state law. Some states tax only property physically located within their borders, which could exclude money sitting in a foreign bank. Others tax any property received by a resident heir regardless of where the asset sits. If you live in one of the five, check your state’s statute before assuming a foreign inheritance is exempt.

Foreign Death Taxes and Treaty Relief

If a foreign country taxed the estate before you received your share, the standard foreign tax credit usually won’t help. Section 901 generally covers only income taxes, war profits taxes, and excess profits taxes, not inheritance or estate taxes paid abroad.¹⁸ Relief for foreign death taxes comes through specific estate tax treaties or through Section 2014, which provides a limited credit against U.S. estate tax for death taxes paid to a foreign country. The U.S. maintains estate and gift tax treaties with a limited set of countries; if the decedent’s country isn’t among them, available relief is narrower and the risk of double taxation is real.

1
Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances
2
Office of the Law Revision Counsel. 26 US Code 6039F – Notice of Large Gifts Received From Foreign Persons
3
Internal Revenue Service. Estate Tax
4
Internal Revenue Service. Life Insurance and Disability Insurance Proceeds
5
Internal Revenue Service. Gifts From Foreign Person
6
Internal Revenue Service. Instructions for Form 3520
7
U.S. Treasury Fiscal Data. Treasury Reporting Rates of Exchange
8
Internal Revenue Service. Delinquent International Information Return Submission Procedures
9
IRS. Instructions for Form 3520-A (Rev. December 2025)
10
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
11
Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements
12
Federal Register. Inflation Adjustment of Civil Monetary Penalties
13
Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers
14
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
15
Internal Revenue Service. Publication 551 – Basis of Assets
16
IRS. Instructions for Form 8621
17
Tax Foundation. Estate and Inheritance Taxes by State, 2025
18
Internal Revenue Service. Foreign Tax Credit