Cross-border · Journal
Inheriting Money from Overseas as a US Person: The Form 3520 Trap and How to Avoid It
US persons who inherit foreign assets face severe penalties if they miss Form 3520 filing. Here's what you need to know.
US persons who inherit foreign assets face severe penalties if they miss Form 3520 filing. Here's what you need to know.
If you are a US citizen or resident alien and you have just inherited money, property or other assets from someone outside the United States, there is a form the IRS rarely explains in plain English. Form 3520 — "Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts" — catches inheritors off guard, usually years after the money arrived, because nothing about receiving an inheritance suggests a filing obligation attaches to it.
You will see it written that missing this form costs 35% of the inheritance. For a bequest from a foreign individual that is wrong, and wrong in a way that frightens people out of proportion to the actual exposure. The 35% figure belongs to foreign trust transactions. What applies to an inheritance from a person is set out further down, along with the defence the statute gives you and the part of the rule that carries no percentage at all — which is the part worth worrying about.
This article walks you through the rules, the risks, and the practical steps to stay compliant when you inherit from abroad.
The IRS treats inheritances from foreign sources differently from domestic ones. While a US citizen inheriting from a US-based estate typically files a straightforward federal income tax return (and pays no federal tax on the inheritance itself, since inherited assets are not income), an inheritance from overseas triggers different reporting rules.
The Form 3520 is the IRS's primary tool to track foreign inheritances and gifts. The official IRS guidance on Form 3520 explains that US persons must report:
The law assumes that without this transparency, US persons could hide wealth offshore or avoid taxation on income generated by inherited assets. Even though the inheritance itself is not taxable, the reporting is mandatory—and that's where the trap springs shut.
Understanding whether your inheritance came through a foreign person (the deceased individual) or a foreign trust changes your filing obligations.
If your relative died and left you money directly—whether by will, intestacy, or through a foreign bank account—and the deceased was a foreign national (or a US person resident abroad), you received a bequest from a "foreign person." This requires Form 3520 reporting.
What you must report:
The threshold is more than $100,000 received in aggregate during the tax year from that nonresident alien individual or foreign estate. Three details decide more cases than the headline figure does:
A different and lower threshold applies to purported gifts from a foreign corporation or partnership, and that one is indexed annually, so check the amount for the year in question rather than carrying one forward. The IRS sets out both on its guidance for gifts from a foreign person.
If the inheritance flowed to you through a trust established in another country—even if that trust was created by your relative—the rules are stricter and the form is mandatory regardless of amount. Foreign trusts are treated as continuing entities, and the IRS requires detailed reporting of any distribution you receive.
Most people never hear about Form 3520 until a tax professional mentions it, often years after the inheritance. The penalty is set out in section 6039F(c), and the detail of it matters, because it is widely misdescribed.
It is 5% of the amount of the gift or bequest for each month the failure continues, capped at 25% in total. Three things follow from that wording, and each one surprises people:
But there is an express defence, and you should not be told otherwise. Section 6039F(c)(2) disapplies the penalty where you show the failure was due to reasonable cause and not to willful neglect. You will find pages saying this penalty bites regardless of whether you knew the form existed. That is not what the statute says, and a first omission by someone who had no idea the form applied to an inheritance is the paradigm reasonable-cause case. It is not automatic — you have to show it — which is why the statement you file with the late form is the part worth real care.
The sharper risk is the part with no percentage attached to it. Section 6039F(c)(1)(A) lets the IRS determine the tax consequences of the receipt itself. In other words, an unreported "gift" can be recharacterised — treated as income rather than accepted as a non-taxable inheritance. That exposure is open-ended in a way a capped percentage is not, and it is the reason this filing is worth getting right even where the sums look modest.
Form 3520 is due by the normal due date of your federal income tax return for the year in which you received the gift or bequest. For most individuals, this is April 15 (or the next business day if the 15th falls on a weekend or holiday), though extensions can shift this to October 15.
Key timing points:
A crucial point that confuses many inheritors: the inheritance itself is not subject to federal income tax, but you must report it. This is why many people never think to mention it to their accountant.
However, income generated by inherited assets is taxable. If you inherit a foreign bank account that earns interest, you owe tax on that interest. If you inherit rental property abroad and collect rent, that's taxable income. If you inherit shares in a foreign company and receive dividends, those are taxable.
Form 3520 is the gateway: it tells the IRS what you inherited so they can cross-reference it with subsequent income filings. If you inherit USD 200,000 in a foreign account but don't report it on Form 3520, and then the IRS sees interest income from that account in later years, they'll investigate.
If you inherited foreign assets months or years ago and didn't file Form 3520, you're not alone—and it's not yet too late to fix the problem.
Here's what to do:
1. Stop worrying and start acting. The IRS gives credit for voluntary disclosure if you come forward before they audit you.
2. File an amended return. Use Form 1040-X to amend the tax year in which you should have reported the inheritance, and attach Form 3520. For more, see amending a US tax return.
3. Include a statement of reasonable cause. Explain why the form was missed (e.g., you didn't know it was required, your accountant didn't mention it). Reasonable cause is decided on the facts you put forward, so this statement is worth drafting with care rather than treating it as a formality.
4. Act sooner rather than later. If the IRS initiates an audit before you file, penalties are harder to reduce.
If your situation is complex—if you're an expat, if multiple inheritances are involved, or if you've also missed other filings—this is exactly when you need professional guidance. Many US business owners and expats who inherit overseas assets have missed prior US tax returns and filings and are unsure how to unwind the situation. That's a more urgent issue to address than Form 3520 alone.
This is the point most often got wrong, and getting it wrong means chasing the wrong document from the wrong person.
Form 3520-A is not triggered by receiving money. It is the annual return of a foreign grantor trust that has a US owner, and the obligation sits with that owner under section 6048(b) — the US owner is the one who has to see that the trustee files it, and who receives the Foreign Grantor Trust Owner Statement from it. Inheriting from a trust does not make you its owner. We set out who counts as an owner in our guide to Form 3520-A and the US owner test.
What a beneficiary actually needs is a different document. If you received a distribution from a foreign trust, you report it in Part III of your own Form 3520, and what you want from the trustee is a Foreign Nongrantor Trust Beneficiary Statement — not a copy of a 3520-A. That statement is what lets the distribution be characterised properly between current income, accumulated income and corpus. Without it, the return falls back on the default method, which assumes the worst about how much of the distribution is accumulated income, and the tax is worked out on that assumption rather than on the facts.
So the practical step is to ask the trustee for a beneficiary statement early, in writing, well before the filing deadline rather than after it — a trustee abroad has no US filing of their own to focus the mind, and the statement is usually slow to arrive. A UK will trust is the common case here, and it is almost always a non-grantor trust from the moment it arises: we explain why in what a US beneficiary inherits from a UK will trust.
If your inheritance includes a foreign financial account, the account is reportable in its own right, separately from the inheritance. Two filings can apply, and they are not the same regime — worth knowing, because they are constantly described as if they were.
The FBAR is a Bank Secrecy Act filing made to FinCEN, not a tax return. It is required where the aggregate value of your foreign financial accounts exceeded USD 10,000 at any time during the calendar year — at any point in the year, not at year end, so an account that briefly held the inheritance and was then emptied still counts. It is due 15 April, with an automatic extension to 15 October that you do not have to apply for.
FATCA is the separate regime, and its form is Form 8938, filed with your income tax return. Its thresholds are higher than the FBAR threshold and they differ with your filing status and whether you live in the US or abroad, so whether it reaches you is a question to settle on your own numbers rather than assume. The two filings overlap heavily, but neither replaces the other.
Form 3520 and the FBAR are separate filings with separate deadlines and separate penalties, and they often apply to the same inheritance. Inheriting a foreign bank account can require both.
Let's say you live in New York and your aunt in London died in June 2023, leaving you £250,000 (approximately USD 315,000 at the time) in a UK bank account. You're a US citizen.
Your obligations:
If you missed the April 2024 deadline, you should file both forms now, with a letter explaining the delay. Doing so voluntarily significantly reduces penalty risk.
Inheriting money from overseas is both a legal and emotional matter. The tax side should not add stress—it should clarify your path forward.
A licensed tax professional with cross-border expertise will:
At Next Tax Source, every US and UK filing is reviewed and signed by an IRS Enrolled Agent who is also ACCA-qualified, ensuring that cross-border inheritances are handled with both jurisdictions' rules in mind.
If you've recently inherited money from abroad, or if you inherited years ago and never heard about Form 3520, now is the time to clarify your position. The sooner you act, the better your options.
Don't assume the inheritance "doesn't count" because it's not income. The IRS doesn't see it that way. And if you've missed previous US tax returns and filings), the inheritance issue is just one part of a larger picture that needs to be addressed comprehensively.
Ready to ensure you're compliant? Book a consultation with our team) to review your inheritance, confirm your filing requirements, and chart the right path forward. We'll give you clarity, peace of mind, and a clear action plan—all before any IRS surprise finds you.