IRS Streamlined Filing UK Inheritance and Form 3520 |

IRS Streamlined Filing UK Inheritance and Form 3520 |

IRS Streamlined Filing: UK Inheritance and Form 3520

IRS Streamlined Filing and UK Inheritance Reporting

The IRS streamlined filing process for Americans who have received UK inheritances addresses one of the most widely missed and most severely penalised information return obligations in the entire US tax code — Form 3520. A US citizen who receives a bequest of more than $100,000 from a foreign estate — including a UK estate — must file Form 3520 by the due date of their annual Form 1040 for the year of receipt. Furthermore, the penalty for failure to file Form 3520 where it is required is 5% of the amount of the foreign bequest for each month the form is delinquent, up to a maximum of 25% — meaning a £350,000 UK inheritance that was not reported produces a maximum penalty of approximately $111,250. Additionally, many Americans who received UK inheritances from UK parents or relatives do not know that Form 3520 exists — their UK solicitor handles the UK inheritance perfectly, HMRC is notified, UK inheritance tax is paid where due, and the American receives their share of the estate with no awareness that a separate US information return was also required. Consequently, the IRS streamlined filing programme provides the most practical route for correcting missed Form 3520 filings — covering the missed return through the reasonable cause framework where the non-filing was non-wilful, and addressing any associated FBAR gaps for the inherited account balances simultaneously.

When Form 3520 Is Required

The $100,000 Annual Threshold

Form 3520 is required for any US person who received bequests, inheritances, gifts, or similar transfers from foreign estates or foreign persons where the aggregate value during the tax year exceeded $100,000. Furthermore, all bequests from the same foreign estate or from related foreign persons are aggregated — multiple distributions from the same estate in the same calendar year are combined when applying the $100,000 threshold. Additionally, the threshold is applied to the dollar value of the inheritance on the date of receipt — sterling amounts are converted to US dollars at the exchange rate on the date of distribution. Consequently, a US citizen who received £85,000 from a UK parent's estate in a year when the GBP/USD rate was 1.28 received approximately $108,800 — above the $100,000 threshold — and was required to file Form 3520 for that year, regardless of any other US filing history. The IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

Distributions Below the $100,000 Threshold

Where a US citizen receives a UK inheritance of less than $100,000 in a tax year, Form 3520 is not required for that inheritance — though the filing threshold must be confirmed using the actual dollar value on the date of receipt. Furthermore, multiple smaller distributions that each fall below $100,000 individually but aggregate above the threshold in the same year must still be reported. Additionally, where the inheritance is received in multiple distributions across different tax years — as is common where probate takes several years — each year's distribution is assessed separately against the $100,000 threshold for that year. Consequently, IRS streamlined filing must assess the distribution pattern and the dollar value in each year separately — since a large estate distributed over three years may trigger Form 3520 in some years but not others, depending on when specific assets are transferred and the exchange rate on each distribution date. The IRS Form 3520 instructions are at https://www.irs.gov/forms-pubs/about-form-3520.

What Form 3520 Reports

The Information Reported on Form 3520

Form 3520 is an information return — it reports the inheritance received but does not create a US income tax liability on the bequest itself. Furthermore, foreign inheritances are not US taxable income — a US citizen who receives £200,000 from a UK estate pays no US income tax on that inheritance; only the UK inheritance tax position applies. Additionally, Form 3520 discloses the identity of the foreign estate or foreign person, the relationship to the filer, the date of distribution, and the amount received — providing the IRS with visibility into large foreign wealth transfers without imposing US income tax on the same transfer. Consequently, many Americans who miss Form 3520 discover that the form they failed to file would have generated zero US tax — the penalty exposure from non-filing is entirely separate from any income tax issue. IRS streamlined filing confirms this position for every client who has missed a Form 3520 — clarifying that the goal of the correction is penalty avoidance, not payment of additional income tax on the inheritance. The IRS Form 3520 instructions are at https://www.irs.gov/forms-pubs/about-form-3520.

UK Trusts and Form 3520

Where a UK estate distributes through a testamentary trust — with a UK trustee distributing to US beneficiaries — the distribution may be reportable on Form 3520 as a distribution from a foreign trust rather than as a direct bequest. Furthermore, the Form 3520 treatment of trust distributions differs from the bequest treatment — trust distributions may include income components that are US-taxable, unlike direct bequests, which are not. Additionally, the trust reporting on Form 3520 is more complex than the bequest section — requiring identification of the trust, the trustee, and the income and principal components of each distribution. Consequently, IRS streamlined filing must determine whether any UK inheritance was received directly from the estate or through a UK testamentary trust, since the correct Form 3520 treatment and the income tax implications differ between these two scenarios.

The Form 3520 Penalty Framework

The 5% Per Month Penalty

The penalty for failure to file Form 3520 where it is required is 5% of the amount of the foreign bequest reported on the form for each month the filing is delinquent, up to a maximum of 25%. Furthermore, for a US citizen who received £200,000 from a UK parent's estate — approximately $254,000 at a 1.27 rate — and did not file Form 3520, the maximum penalty is 25% of $254,000, which is $63,500. Additionally, the penalty is assessed based on the amount that should have been reported — not the amount actually reported, since nothing was filed. Consequently, the Form 3520 penalty can be the largest single US tax penalty that a UK-resident American faces — significantly larger than the FBAR non-wilful penalty for most estates — making the IRS streamlined filing correction for missed Form 3520 filings one of the most financially urgent cross-border tax engagements. The IRS Form 3520 penalty guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

The Reasonable Cause Exception

The IRS provides penalty relief for missed Form 3520 filings where the non-filer demonstrates reasonable cause for the failure. Furthermore, reasonable cause in the Form 3520 context typically arises where the US citizen was not aware that Form 3520 was required — a genuine lack of knowledge of the filing obligation that resulted from the failure of advisers in the UK inheritance chain to flag the US reporting requirement. Additionally, a UK solicitor managing the estate administration, a UK accountant advising on the UK inheritance tax position, and a UK probate specialist handling the HMRC reporting all manage the inheritance correctly under UK law — but none of these advisers has any obligation to advise on US tax obligations. Consequently, the IRS streamlined filing submission for a missed Form 3520 must include a reasonable cause statement — explaining the advisory chain, the nature of the UK advisers involved, and the specific circumstances that led to the non-filing — as the foundation for penalty abatement.

The Streamlined Programme and Form 3520

How the Streamlined Procedures Handle Form 3520

The IRS streamlined filing foreign offshore procedures cover international information returns — including Form 3520 — for the three covered return years. Furthermore, a US citizen who received a UK inheritance three years ago and did not file Form 3520 can include the missed Form 3520 in the streamlined submission — alongside three amended Form 1040 returns and six years of FBARs. Additionally, the streamlined submission provides a coordinated correction for all non-compliance in the covered period — addressing the Form 3520 gap, any FBAR gap for inherited account balances, and any income tax gaps simultaneously. Consequently, the streamlined correction is the most efficient route for correcting a missed Form 3520 where the non-filing was non-wilful, and the inheritance occurred within the three-year covered period — providing penalty protection through the 5% miscellaneous offshore penalty rather than the 5% per month Form 3520 penalty. The IRS streamlined guidance is at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.

When the Inheritance Is Outside the Streamlined Window

Where the UK inheritance was received more than three years ago — outside the three-year covered period for the streamlined return correction — the missed Form 3520 cannot be included in the streamlined submission directly. Furthermore, the most appropriate correction route in this scenario is a standalone delinquent Form 3520 filing accompanied by a reasonable cause statement — requesting that the IRS waive the 5% per month penalty based on the non-wilful nature of the non-filing. Additionally, a well-drafted reasonable cause statement — explaining the UK advisory chain, the lack of US tax knowledge of those advisers, and the absence of any intent to evade US reporting requirements — provides a strong basis for penalty abatement in most cases involving UK inheritances. Consequently, IRS streamlined filing prepares the reasonable cause statement as a core deliverable in any standalone Form 3520 correction — treating it with the same care as the Form 14653 non-wilfulness certification in the streamlined programme. The IRS's reasonable cause guidance is at https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-reasonable-cause.

FBAR Implications of UK Inheritances

Inherited UK Bank Accounts

Where a UK inheritance includes bank account balances — cash accounts transferred from the deceased's estate directly to the US beneficiary — those accounts become FBAR-reportable from the date of transfer. Furthermore, where the inheritance is received into an existing UK bank account, the inherited cash elevates the account balance — potentially causing the FBAR aggregate to exceed the $10,000 threshold for the first time in the year of inheritance. Additionally, where a new UK bank account is opened specifically to receive the inheritance — a separate estate account in the beneficiary's name — that new account is FBAR-reportable from its opening date in the year it is established. Consequently, IRS streamlined filing confirms the FBAR position for the year of any UK inheritance — identifying any new accounts opened to receive the proceeds and confirming whether the inherited cash elevated any existing account balance above the FBAR threshold. The FinCEN FBAR guidance is at https://www.fincen.gov/financial-crimes-enforcement-network/fbar.

Inherited UK Investment or Property Interests

Where the UK inheritance includes investment accounts — shares held through a UK broker or an ISA — those investment accounts become FBAR-reportable from the date of transfer to the beneficiary. Furthermore, where UK property is inherited, the property itself is not a foreign financial account for FBAR purposes — direct property ownership is not reportable on the FBAR. Additionally, where the UK property generates rental income that is deposited into a UK bank account, that bank account is FBAR-reportable from the date of the first deposit — and the rental income is US-taxable on Schedule E. Consequently, IRS streamlined filing traces every asset category in a UK inheritance — distinguishing financial accounts that create FBAR obligations from direct property interests that create Schedule E obligations but not FBAR obligations.

Case Study: US Citizen, UK Parental Inheritance, Form 3520 Gap

Our team was engaged by a US citizen living in Edinburgh who had received a UK inheritance of approximately £180,000 from her mother's estate four years earlier. Furthermore, the inheritance consisted of £95,000 of cash (distributed from the estate bank account to the beneficiary's personal current account) and £85,000 of shares held in a Hargreaves Lansdown stocks and shares ISA, transferred to a new ISA in the beneficiary's name. Additionally, no Form 3520 had been filed — the UK solicitor who administered the estate had not advised on US tax obligations, and the beneficiary had not been aware that a separate US information return was required.

The IRS streamlined filing correction analysis produced the following. The total inheritance of £180,000 at a 1.26 rate on the distribution date was approximately $226,800 — above the $100,000 Form 3520 threshold. Furthermore, since the inheritance was received four years ago — outside the three-year streamlined window — a standalone delinquent Form 3520 was prepared with a detailed reasonable cause statement. The reasonable cause statement confirmed: the UK solicitor managed the estate professionally under UK law, the beneficiary received UK legal and probate advice throughout, no UK adviser flagged the US Form 3520 obligation, and the non-filing was entirely due to a genuine lack of knowledge rather than any intent to evade. Additionally, the FBAR for the year of inheritance was corrected — including the personal current account at its elevated post-inheritance balance and the new Hargreaves Lansdown ISA. A six-year FBAR correction was filed through the streamlined procedures for the income tax and FBAR gaps. The 5% streamlined penalty was assessed on the highest aggregate FBAR balance, including the ISA — approximately £168,000 ($212,000) — producing a penalty of $10,600. Consequently, the IRS accepted the reasonable cause statement for the Form 3520 — waiving the 5% per month penalty entirely — and the 5% streamlined penalty addressed the FBAR and income tax gaps. Total correction cost: $10,600 streamlined penalty plus preparation fees.

Common Form 3520 Mistakes

Not Filing Because No US Tax Was Due

The most common Form 3520 error is not filing because the inheritance is not US taxable income — assuming that since no US income tax was owed, no US filing was required. Furthermore, Form 3520 is an information return — it is required regardless of the income tax position, and the penalty applies regardless of whether any US income tax would have arisen. The correct approach requires IRS streamlined filing to file Form 3520 for every year in which a UK inheritance exceeded $100,000 — treating the information return obligation as entirely independent of the income tax calculation.

Not Including Form 3520 in the Streamlined Submission

Many streamlined submissions for UK-based Americans correctly address the FBAR and the Form 1040, but omit Form 3520 for a UK inheritance received during the covered period. Furthermore, a streamlined submission that omits a required Form 3520 is incomplete — and does not protect against the Form 3520 penalty for that year. The correct approach requires IRS streamlined filing to ask specifically about UK inheritances at the start of every streamlined engagement — confirming whether any UK estate distribution exceeded $100,000 in any of the covered years.

Not Drafting the Reasonable Cause Statement Specifically

A generic reasonable cause statement that simply states the filer was unaware of the requirement is insufficient for a missed Form 3520 with a large penalty exposure. Furthermore, the IRS gives specific scrutiny to Form 3520 penalty abatement requests — and a well-drafted statement addressing the specific UK advisory chain, the probate process, and the absence of any US adviser involvement is significantly more likely to succeed than a generic one-line statement. The correct approach requires IRS streamlined filing to draft a factual, specific, reasonable cause statement for each missed Form 3520 — covering every adviser the beneficiary used, the specific UK probate process, and the precise circumstances of the non-filing.

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 for Americans in the UK who have received UK inheritances and missed Form 3520 filings. Furthermore, we assess whether the inheritance exceeded the $100,000 threshold, prepare the delinquent Form 3520, draft the reasonable cause statement for penalty abatement, correct any associated FBAR gaps through the streamlined procedures, and advise on the FBAR and income tax treatment of inherited UK financial accounts and property. Additionally, we prepare Form 3520 annually for any ongoing UK trust distributions.

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

Conclusion

The Form 3520 filing obligation for US citizens who receive UK inheritances above $100,000 is one of the most widely missed and most severely penalised information return requirements in US tax, with a maximum penalty of 25% of the inheritance amount for non-filing. Furthermore, the IRS streamlined filing programme provides the correction route for missed Form 3520 filings within the three-year covered period — replacing the 5% per month penalty with the 5% miscellaneous offshore penalty on the FBAR balance. Moreover, standalone delinquent Form 3520 filings with well-crafted reasonable cause statements provide penalty abatement for inheritances outside the streamlined window — and the IRS routinely accepts such statements where the UK advisory chain is clearly documented, and the non-filing was genuinely non-wilful. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 today.

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FAQs

Q: When is Form 3520 required for a UK inheritance?

A: When the aggregate value of bequests from foreign estates exceeded $100,000 in a calendar year. The dollar value is calculated at the exchange rate on the date of distribution. All distributions from the same estate in the same year are aggregated. The filing is required regardless of whether any US income tax is owed on the inheritance.

Q: Is a UK inheritance taxable in the United States?

A: No. Foreign inheritances are not US taxable income. Form 3520 is an information return that discloses the inheritance but does not create a US income tax liability. The penalty for failing to file Form 3520 is entirely separate from any income tax issue.

Q: What is the penalty for missing Form 3520?

A: 5% of the amount of the foreign bequest per month the filing is delinquent, up to a maximum of 25%. For a £200,000 UK inheritance at a 1.27 rate ($254,000), the maximum penalty is $63,500. The penalty can be waived through a reasonable cause statement where the non-filing was non-wilful.

Q: Can the streamlined programme correct a missed Form 3520?

A: Yes, where the inheritance was received within the three-year covered period. Form 3520 can be included in the streamlined submission alongside the amended Form 1040 returns and FBARs. For inheritances outside the three-year window, a standalone delinquent Form 3520 with a reasonable cause statement is the correct route.

Q: What is the reasonable cause statement for Form 3520?

A: A written explanation demonstrating that the non-filing resulted from a genuine lack of knowledge — not willful evasion. For UK inheritances, the statement explains the UK advisory chain (solicitor, probate specialist), that none of those advisers flagged the US obligation, and the circumstances of the non-filing. A specific, factual statement is more likely to succeed than a generic one.

Q: Are inherited UK bank accounts FBAR-reportable?

A: Yes. Where a UK inheritance includes cash transferred to a UK bank account, that account becomes FBAR-reportable from the date of transfer. New accounts opened to receive the inheritance are reportable from the opening date. The inherited cash may also push an existing account above the $10,000 aggregate FBAR threshold for the first time.