IRS Streamlined Filing for UK Inheritance and Form 3520 |

IRS Streamlined Filing for UK Inheritance and Form 3520 |

IRS Streamlined Filing for UK Inheritance and Form 3520

IRS Streamlined Filing and the Form 3520 Correction for UK Inheritances

The IRS streamlined filing process for Americans in the United Kingdom who have received UK inheritances and missed Form 3520 differs in a critical way from the standard streamlined submission, because Form 3520 is not one of the information returns that the streamlined procedures directly protect. The IRS streamlined foreign offshore procedures provide penalty protection for three years of amended Form 1040 returns and any attached information returns, including Form 5471 and Form 8621. However, Form 3520 — the annual return reporting transactions with foreign trusts and the receipt of certain foreign gifts and inheritances — is a standalone return filed separately from the Form 1040, with its own separate penalty regime. Furthermore, the Form 3520 penalty for failure to file — 5% of the inheritance amount per month, up to a maximum of 25% — is assessed independently of the FBAR and income tax return penalties and is not replaced by the 5% streamlined miscellaneous offshore penalty. Additionally, the most effective correction route for a missed Form 3520 in the context of an IRS streamlined filing engagement is the IRS delinquent international information return procedures combined with a reasonable cause statement — filed simultaneously with the streamlined submission for the FBAR and income tax corrections, but addressed through a separate procedural route. Consequently, the IRS streamlined filing engagement for a UK-resident American who received a UK inheritance and has outstanding FBAR and Form 1040 gaps, alongside the missing Form 3520, must address all three compliance areas simultaneously — the streamlined procedures for the FBAR and income tax gaps, and the delinquent information return procedures with reasonable cause for the Form 3520.

Form 3520 and UK Inheritances

When Form 3520 Is Required

Form 3520 is required for any US person who receives more than $100,000 from a foreign person — including gifts and inheritances — during a calendar year. Furthermore, the $100,000 threshold is assessed on the aggregate of all amounts received from foreign persons during the year — meaning multiple smaller amounts from the same foreign person are combined when determining whether the threshold is met. Additionally, a UK inheritance of £70,000 at a 1.28 exchange rate = $89,600 does not require Form 3520, but the same inheritance at a 1.45 exchange rate = $101,500 does — making the exchange rate on the date of receipt a critical factor in the threshold assessment. Consequently, IRS streamlined filing confirms the dollar value of every UK inheritance at the applicable exchange rate before assessing whether the $100,000 threshold was met — and advises clients that the threshold determination is not a simple sterling-to-dollar conversion at the current rate. The IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

UK Inheritances Are Not US-Taxable

A critical point that every IRS streamlined filing engagement must communicate clearly is that the Form 3520 filing obligation for a UK inheritance does not mean the inheritance is subject to US income tax. Furthermore, foreign inheritances received by US persons are generally not included in US gross income — the inheritance itself is not an income tax event for the US recipient. Additionally, Form 3520 is an information return — it reports the receipt of the inheritance to the IRS for transparency purposes without creating an income tax liability. Consequently, the Form 3520 penalty for failing to file — up to 25% of the inheritance amount — is a penalty for failing to file an information return, not a penalty for failing to pay tax. The fact that no US income tax is owed on the inheritance does not reduce or eliminate the Form 3520 penalty. The IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

The Form 3520 Penalty Structure

The 5% Per Month Up to 25% Penalty

The penalty for failure to file Form 3520 in respect of a foreign inheritance is 5% of the gross reportable amount per month the form is delinquent, up to a maximum of 25% of the gross reportable amount. Furthermore, the gross reportable amount is the dollar value of the inheritance at the applicable exchange rate — meaning the penalty base is the full inheritance amount, not any net value after estate costs or distributions. Additionally, for a UK inheritance of £180,000 received at a 1.27 rate ($228,600), the maximum 25% penalty is $57,150 — a significant financial consequence for failing to file a form that generates no income tax. Consequently, the Form 3520 penalty is consistently the largest single penalty amount in any streamlined correction that involves a UK inheritance, often exceeding the combined FBAR and income tax penalties for the same period. IRS streamlined filing calculates the maximum Form 3520 penalty as the first step in any correction engagement where a UK inheritance was received — confirming the penalty exposure before any programme decision is made. The IRS penalty guidance is at https://www.irs.gov/irm/part20/irm_20-001-008.html.

The Penalty Notice Process

The IRS assesses the Form 3520 penalty through a CP15 penalty notice — issued after the IRS identifies the missing return, typically from information received from foreign financial institutions under FATCA or from other IRS processes. Furthermore, where the IRS has not yet issued a CP15 notice, the client has the opportunity to file the missing Form 3520 proactively — either through the delinquent international information return procedures or through a specific amendment — before the penalty is formally assessed. Additionally, where a CP15 notice has already been issued, the response must be made within 60 days of the notice date — and IRS streamlined filing treats any CP15 notice as an immediate priority requiring a written reasonable cause response within the 60-day window. Consequently, the timing of the correction — before or after a CP15 notice — significantly affects the procedural approach, and IRS streamlined filing establishes the CP15 status at the start of every engagement involving a missed Form 3520.

The Delinquent International Information Return Procedures

How the Delinquent Procedures Work

The IRS delinquent international information return procedures allow taxpayers who have not filed required information returns to file the missing returns with an explanation, provided no examination has been opened, and no IRS contact regarding the specific return has been received. Furthermore, the delinquent procedures require the missing Form 3520 to be filed with an attached reasonable cause statement explaining why the return was not filed on time. Additionally, where the reasonable cause statement is accepted by the IRS, no penalty is assessed — the delinquent filing cures the non-compliance without penalty. Consequently, the delinquent procedures with a well-drafted reasonable cause statement represent the most cost-effective correction route for a missed Form 3520, and IRS streamlined filing drafts the reasonable cause statement as the central document in the Form 3520 correction, treating it with the same care given to the Form 14653 non-wilfulness certification in the streamlined submission. The IRS delinquent procedures guidance is at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.

Building the Reasonable Cause Statement

A strong reasonable cause statement for a missed Form 3520 in the context of a UK inheritance addresses three core elements: the specific circumstances that led to the non-filing, the advisory chain confirming that neither the UK solicitor who administered the estate nor any other adviser mentioned the US Form 3520 obligation, and the lack of any prior awareness that a US information return was required for receiving a UK inheritance. Furthermore, many UK solicitors and UK accountants are unaware of the Form 3520 requirement — they correctly advise on UK inheritance tax implications while not knowing the US international information return obligations. Additionally, the reasonable cause position for a non-wilful UK-resident American who received a UK inheritance through a UK solicitor is typically strong — the advisory chain clearly explains why the US obligation was unknown. Consequently, IRS streamlined filing of the Form 3520 reasonable cause statement in collaboration with the client, confirming every factual element against the client's specific circumstances and the documentation from the UK estate administration.

Coordinating Form 3520 Correction With the Streamlined Submission

Filing Both Simultaneously

Where a UK-resident American has both a Form 3520 gap from a UK inheritance and the standard FBAR and income tax gaps that the IRS streamlined filing submission addresses, both corrections should be filed simultaneously — the streamlined submission for the FBAR and income tax gaps, and the delinquent Form 3520 with a reasonable cause statement for the inheritance gap. Furthermore, filing both simultaneously demonstrates a comprehensive good-faith correction — addressing every compliance area identified rather than leaving any gap unresolved. Additionally, coordinating both submissions means the client has a single engagement cost and a single correction event rather than two separate correction processes. Consequently, IRS streamlined filing plans the Form 3520 correction and the streamlined submission as a single coordinated filing event — preparing the reasonable cause statement alongside the Form 14653 non-wilfulness certification and filing both corrections on the same date.

The Streamlined Penalty Is Not Reduced by Form 3520

TheIRS streamlined filing 5% miscellaneous offshore penalty is calculated on the highest aggregate FBAR balance, and the Form 3520 inheritance amount does not reduce or affect this calculation. Furthermore, the penalty for the Form 3520 gap and the penalty for the FBAR gap are completely separate — each assessed under its own framework. Additionally, a successful reasonable cause statement that eliminates the Form 3520 penalty does not reduce the streamlined 5% penalty on the FBAR aggregate. Consequently, the total correction cost for a client with both an inheritance gap and a standard FBAR gap includes both the 5% streamlined penalty and any Form 3520 penalty that is not waived through reasonable cause — and IRS streamlined filing presents this combined penalty analysis to the client before any correction is submitted.

Form 3520 for UK Trusts and Discretionary Distributions

When UK Trust Distributions Require Form 3520

Form 3520 is also required where a US person receives a distribution from a foreign trust — including discretionary distributions from a UK family trust. Furthermore, distributions from a UK trust to a US-citizen beneficiary are reportable on Form 3520 in the year of receipt — regardless of whether the distribution is characterised as income, capital, or a return of the original settlement. Additionally, the threshold for trust distributions is different from the inheritance threshold — any distribution from a foreign trust must be reported on Form 3520, regardless of amount, not just distributions above $100,000. Consequently, IRS streamlined filing asks specifically about UK family trusts — discretionary or otherwise — at the start of every new client engagement, since trust distributions are the most commonly unidentified Form 3520 trigger for UK-resident Americans with family connections in the United Kingdom. The IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

Case Study: UK Inheritance, Missed Form 3520, Coordinated Correction

Our team completed a coordinated IRS streamlined filing and Form 3520 correction for a US citizen who had lived in Bristol for five years. Furthermore, she had received a UK inheritance of £145,000 from her mother's estate three years earlier — administered by a Bristol solicitor who had correctly handled the UK inheritance tax position but had never mentioned any US filing obligations. Additionally, she had the standard FBAR gaps for her five years of UK residence — personal accounts, ISA, and workplace pension all omitted from every FBAR — and had never filed a US return.

The IRS streamlined filing coordination proceeded as follows. FBAR assessment: highest aggregate balance in year three — personal current account £18,000, savings account £31,000, ISA £42,000, workplace pension £28,000 — combined aggregate approximately £119,000 ($151,130 at the Treasury rate). 5% streamlined penalty $7,557. Form 3520 assessment: inheritance of £145,000 received at a 1.29 rate in year three = $187,050. The $100,000 threshold was clearly met. Maximum 25% Form 3520 penalty would be $46,763. Furthermore, the reasonable cause statement was drafted around the following facts: the UK solicitor administered the estate without mentioning any US filing; the client had no prior US tax adviser; the US obligation to file an information return for receiving an inheritance from a UK parent was genuinely unknown; no CP15 notice had been received. The delinquent Form 3520 with a reasonable cause statement was filed simultaneously with the streamlined submission. IRS accepted the reasonable cause — no penalty assessed on the Form 3520. Additionally, the streamlined 5% penalty of $7,557 was paid with the submission. Consequently, the total correction cost was $7,557 — the 5% streamlined penalty — compared to a combined maximum exposure of $7,557 plus $46,763 = $54,320 without the coordinated correction.

Common Form 3520 Inheritance Mistakes

Assuming No US Filing Required Since No US Tax Is Owed

The most common Form 3520 error is assuming that because no US income tax is owed on the inheritance, no US filing is required. Furthermore, Form 3520 is an information return — the filing obligation exists regardless of the income tax position. The correct approach requires IRS streamlined filing to assess the Form 3520 obligation at the start of every engagement by asking specifically about UK inheritances and trust distributions received in any prior year.

Not Calculating the Dollar Value at the Receipt Date Rate

Some advisers assess the $100,000 threshold using the current exchange rate rather than the rate on the date of receipt. Furthermore, the threshold is determined at the time of receipt, and a sterling inheritance that was above $100,000 at the 2021 rate may appear below the threshold at a weaker current rate. The correct approach requires IRS streamlined filing to confirm the exchange rate on the specific date each payment from the estate was received — not a single current-rate conversion of the total inheritance.

Filing the Form 3520 Without a Reasonable Cause Statement

Filing the delinquent Form 3520 without a reasonable cause statement leaves the penalty exposure in place — the IRS may assess the 25% penalty even where the form is belatedly filed. Furthermore, the reasonable cause statement is the critical document that prevents the penalty from being assessed. The correct approach requires IRS streamlined filing to draft a specific, factual, reasonable cause statement for every delinquent Form 3520 — treating it as a mandatory accompaniment to every late filing rather than an optional addition. IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

How US-UK Tax Can Help

At US-UK Tax, our team of Enrolled Agents, Chartered Tax Advisers, and Certified Public Accountants provides specialist IRS streamlined filing and Form 3520 correction for UK-resident Americans who received UK inheritances or trust distributions. Furthermore, we assess the $100,000 threshold using the receipt-date exchange rate, calculate the maximum 25% Form 3520 penalty before any correction decision is made, draft a specific factual reasonable cause statement addressing the UK advisory chain and the absence of prior awareness, coordinate the delinquent Form 3520 submission with the streamlined correction, and present the combined penalty analysis to every client before any work begins.

Contact our team today. Email hello@us-uktax.com call 0333-8807974, or visit https://www.us-uktax.com/contact/.

Conclusion

The IRS streamlined filing correction for a UK-resident American who missed Form 3520, alongside the standard FBAR and income tax gaps requires a coordinated two-track approach — the streamlined procedures for the FBAR and income tax corrections, and the delinquent international information return procedures with a reasonable cause statement for the Form 3520 inheritance gap. Furthermore, the Form 3520 25% maximum penalty is typically the largest single penalty amount in any correction engagement where a UK inheritance was received, making the reasonable cause statement the most financially significant document in the entire correction. Moreover, the fact that no US income tax is owed on a UK inheritance does not reduce or eliminate the Form 3520 penalty — the obligation is an information return requirement that exists regardless of the income tax position. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 today.

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FAQs

Q: Is Form 3520 required for every UK inheritance?

A: Only where the total from foreign persons exceeds $100,000 in a calendar year, at the receipt-date rate. Multiple amounts from the same person are aggregated.

Q: Does Form 3520 mean the inheritance is US-taxable?

A: No. Foreign inheritances are not US-taxable income. Form 3520 is an information return. The 25% penalty applies regardless of whether US income tax is owed.

Q: What is the maximum Form 3520 penalty for a UK inheritance?

A: 25% of the gross dollar value — e.g., 25% of $187,050 = $46,763. Applies to the full amount regardless of estate costs or how the inheritance was distributed.

Q: Can the Form 3520 penalty be eliminated?

A: Yes, via a reasonable cause statement with the delinquent Form 3520. Where accepted, no penalty is assessed — the statement must address the advisory chain.

Q: Does the streamlined 5% penalty cover the Form 3520 gap?

A: No. The 5% streamlined penalty covers FBAR and income tax gaps only. Form 3520 has its own regime and is filed separately via the delinquent return procedures.

Q: Are UK trust distributions reportable on Form 3520?

A: Yes. Trust distributions are reportable regardless of amount — no $100,000 threshold applies, unlike for gifts and inheritances from foreign persons.