You Inherited From Israel Years Ago and Never Told the IRS: The 25 Percent Penalty the IRS Stopped Assessing Automatically, the Penalty-Free FBAR Door It Closed in July, and the Order in Which to Come Forward

This is orientation, not legal or tax advice. It maps what exists and the questions to take to a licensed professional. It does not tell you what to do about your own estate or taxes.

The scene is quieter than most on this site. Nobody has died this month. The Israeli estate closed years ago: the succession order issued, the apartment in Petah Tikva or Haifa was sold, the sibling in Israel wired the American's share, and the money has been sitting in a US brokerage account ever since, or paid down a mortgage, or put a child through college. The US return for that year was filed by the same preparer as always, and the inheritance was not on it, because there was nothing to tax and nobody asked.

Then something surfaces it. A new accountant asks where the down payment came from. A bank asks about the source of funds. An article like this one is forwarded by a cousin. And the American heir learns, three or five years after the fact, that the year the money arrived there was a form due, that the form is called Form 3520, and that the penalty for not filing it is written not as a flat number but as a percentage of what was inherited.

This page is about that heir. It is not about the heir in the first year, who is mapped on the Form 3520 page and still has time. It is about the one whose year has passed, who has an open item nobody else knows about, and who wants to know what closing it actually costs, in what order to do it, and whether waiting is a plan.

The form that was never about tax

Form 3520, Part IV, exists because Congress wanted to see large money arriving from abroad even when no tax is due on it. A US person who receives more than $100,000 in a year from a nonresident alien individual or a foreign estate reports it: who it came from, what it was, what it was worth. The form is not attached to the tax return. It is due on the same day as the return, including extensions, and is mailed separately to the service center in Ogden, Utah. It generates no tax. An inheritance is excluded from income under section 102 of the Code, and Israel imposes no inheritance tax on its end, so for most heirs the arrival of the money was, correctly, a non-event on both returns.

That is precisely why it gets missed. The preparer in Cleveland was never told about a foreign estate, and if told, may not have known the form. The heir read that inheritances are not taxable and stopped reading. Nothing in the process, on either side of the ocean, prompts the filing. The National Taxpayer Advocate put it plainly in 2024: because gifts and inheritances are excludable from income, taxpayers may not realize they have to report them, and the people who trip over this are disproportionately immigrants and families of ordinary means, not the sophisticated.

The statute behind the form is section 6039F. It does two things when the form is late. It lets the IRS determine the tax consequences of the receipt itself, which means the agency may decide for itself whether the money was really an inheritance. And it imposes a penalty: 5 percent of the amount received for each month the failure continues, capped at 25 percent of the total. Five months late, the cap is reached. On a $400,000 share of an Israeli apartment, the cap is $100,000. The same statute contains the exit: the penalty does not apply if the person shows the failure was due to reasonable cause and not willful neglect.

What the IRS did with that penalty for a decade

For roughly ten years, the reasonable cause exception was true on paper and nearly unreachable in practice. The IRS treated a late Form 3520 the way a parking meter treats an expired ticket. When the form arrived, a computer assessed the penalty, usually at the 25 percent maximum, without anyone reading the explanation stapled to the front. A notice went out. Collection followed. The heir who had voluntarily come forward, often within weeks of learning the rule, then had to protest to the Independent Office of Appeals, wait, resubmit the same explanation, and sometimes pay the full amount to get into a court that would listen.

The Taxpayer Advocate's office counted what that produced. Over 2018 to 2021, taxpayers who reported $400,000 or less in income received an average section 6039F penalty of over $235,000. Over the same four years the IRS abated more than $179 million per year of those penalties after the fact. The abatement rate was 67 percent of the penalties assessed and 78 percent of the dollars. Two out of three penalties the machine imposed were later withdrawn, once a human being read the file. The Advocate's conclusion was that the numbers themselves showed how often the penalty had been wrongly assessed in the first place.

The door that opened in October 2024

On October 24, 2024, IRS Commissioner Danny Werfel, speaking at a tax controversy conference at UCLA, announced that the IRS had ended automatic assessment of the penalty on late-filed Forms 3520, Part IV. The National Taxpayer Advocate published the details the same day. Going forward, a reasonable cause statement attached to a late foreign-gift or foreign-inheritance report would be read before any penalty was assessed, not after.

The Commissioner's own example, as reported in the accounting press, was almost exactly the reader of this site: someone whose parent overseas has died, who is dealing with the estate and with grief and with every moving piece at once, and who in the middle of all that files the form late. The IRS's position now is that such a person should be heard before being billed.

The IRS's delinquent international information return page reflects the change. It tells a late filer to write "Reasonable Cause Statement attached" across the top of the first page of Form 3520, and it states that for Form 3520 the statement will be considered prior to a penalty being assessed. The same page is careful to say that for other late international forms, penalties may still be assessed without regard to the attached statement. The special treatment is for this form.

Three things this change is not. It is not an amnesty; the statute and the 25 percent cap are unchanged, and a weak explanation still draws the penalty. It is not a promise; the IRS created the practice by announcement and can end it the same way, and July 2026 showed what that looks like. And it is not a settled definition of reasonable cause. The IRS has never written down what reasonable cause means for this penalty, and in 2026 it is still litigating the question. In one California case reported this year, an heir who had relied on consumer tax software was assessed $71,777, the full 25 percent of a $287,108 gift; Appeals trimmed it by a fifth, she paid the rest and sued for a refund, and the court held that the IRS does have authority to assess the penalty at all, which had been contested. In another 2026 case a court allowed a similar software-reliance defense to proceed to trial rather than dismissing it. The door is open. What happens on the other side of it depends on the statement.

The door that closed in July 2026

The Form 3520 story has a companion, and it moved the other way.

An heir who received an Israeli inheritance usually also had, at some point, an Israeli bank account holding it, and an account over $10,000 at any moment in a year triggers the FBAR, the foreign bank account report filed with FinCEN. The FBAR is the form most heirs miss second, after Form 3520. For twelve years the IRS ran a written program for exactly this heir, the Delinquent FBAR Submission Procedures: file the late reports, choose a reason from a drop-down menu, and if all the income from the accounts had been reported and taxed, no penalty. The program was a page on the IRS website. It had been there since June 2014.

On or about July 1, 2026, the page was removed. There was no press release, no notice, no transition guidance. The link returns a page-not-found. Practitioners across the country wrote about it within days, and the consensus is worth stating carefully, because the removal is easy to read as worse than it is. The FBAR penalty statute, 31 USC 5321, says the Treasury may impose a civil penalty for a late report; it has never said must. The Internal Revenue Manual, the IRS's own instruction book for examiners, still tells them not to penalize a late filer who meets the old program's conditions. What was lost is the public promise a taxpayer could point to. What remains is a discretionary penalty, evaluated case by case, and an examiner's manual that leans toward mercy.

The lesson for the heir with an open item is not about the FBAR specifically. It is that these procedures are administrative gifts, not statutory rights. The IRS made them, the IRS can unmake them, and it does so without warning. The Form 3520 reasonable-cause door has been open for two years. Nothing guarantees a third.

Why the clock on an unfiled form never starts

Heirs sometimes ask whether an old omission has simply expired. The general rule in section 6501 is that the IRS has three years to assess, measured from the day a return is filed. The word that matters is filed. An information return that was never filed has never started that clock. The 6039F penalty on a Form 3520 that was never submitted is not three years old or five years old; it is pending, and it stays pending until the form goes in.

There is a second and larger version of the same rule. Section 6501(c)(8) provides that if certain international information is not furnished, the assessment period for the entire tax return to which it relates does not close until three years after the information is finally provided. The list of forms in that subsection includes section 6038D, which is Form 8938, the statement of specified foreign financial assets that an heir with an inherited Israeli account above the thresholds files with the Form 1040. An heir who skipped Form 8938 for 2022 has a 2022 return that is still open for assessment, in full, on every line, until three years after the 8938 is furnished. Form 3520, Part IV, is not on the (c)(8) list, which is a small mercy: the missed inheritance report does not by itself reopen the whole return. The missed 8938 does.

So the honest answer to "has it expired" is: the part you never filed has not, and depending on what else was skipped, the year around it may not have either. Waiting does not run out a clock. It only decides whether the first move is yours or the IRS's, and the delinquent-return procedures are explicitly unavailable to a taxpayer the IRS has already contacted about the missing forms.

Three ways to come forward, and which heir each fits

The right path depends on what was missed, and the three common cases sort cleanly.

The heir who missed only Form 3520. The inheritance arrived, the Israeli account was closed within the year or never crossed the thresholds, and every dollar of income since has been reported. This heir files the late Form 3520 on its own, to Ogden, with "Reasonable Cause Statement attached" at the top of page one and the statement behind it. No amended return is needed, because nothing on the return was wrong. Since October 2024 the statement is read before any penalty, and the Advocate's figures suggest that a truthful, specific account from an heir with no unreported income is the kind of file that was being abated two times out of three even under the old regime.

The heir who missed Form 3520 and Form 8938, but reported all the income. The Israeli account stayed open into the following year, the interest on it was small but was declared, and the 8938 that should have listed the account was not filed. This heir uses the IRS's delinquent international information return procedures: the late 8938 is attached to an amended return for the year, with a reasonable cause statement, and the late 3520 goes separately to Ogden as above. The IRS page warns that for the 8938 the penalty may be assessed before the statement is read, so this heir should expect possible correspondence and keep copies of everything. The late FBARs are filed electronically with FinCEN with an explanation; since July the written no-penalty promise is gone, but the penalty remains discretionary and the examiner's manual still points the same way.

The heir who missed the forms and some of the income. The apartment was rented out for two years before it sold and the rent never reached the US return, or the inherited Israeli funds turned out to be PFICs, or the pension or keren hishtalmut threw off income nobody translated. This heir has a tax problem, not only a paperwork problem, and the delinquent-return procedures are the wrong tool. The path is the Streamlined Filing Compliance Procedures, in one of two versions. An heir living in Israel, or who spent 330 full days outside the United States with no US abode in any one of the last three filed years, uses the Streamlined Foreign Offshore Procedures: three years of amended or delinquent returns with every information return attached, six years of FBARs, a signed Form 14653 certifying that the failures were not willful, the words "Streamlined Foreign Offshore" written in red across the top of every page, all on paper, to Austin. Tax and interest are paid; no penalties of any kind are imposed on a qualifying submission. An heir living in the United States uses the domestic version and pays a 5 percent miscellaneous offshore penalty on the highest year-end balance of the unreported assets. Both versions require that the IRS has not already opened an examination, and both are, like the FBAR program that vanished in July, administrative procedures that exist at the IRS's pleasure.

One thing all three paths share. The reasonable cause statement, or the Form 14653 narrative, is a chronology, not an apology. When the parent died, when the money arrived, who prepared the return and what they were told, what the heir understood about the tax treatment and why, when and how the heir learned of the filing requirement, and what was done within what number of days of learning it. The IRS's own manual defines reasonable cause as ordinary business care and prudence that nevertheless fell short, and the statement is the evidence of it. Vagueness is read as concealment. A date on every sentence is read as candor.

The Israeli side has nothing to correct, usually

Heirs in this position sometimes assume there must be an Israeli confession to make as well. Usually there is not. Israel has had no inheritance or estate tax since 1981, the succession order was a court process rather than a tax filing, and if the apartment was sold the land appreciation tax was assessed at the sale by the lawyer who handled it. The transfer itself left no open Israeli item. The exceptions are income items: rent collected on an inherited apartment that was never reported to the Israel Tax Authority, or an Israeli account that continued to earn interest at a rate the bank withheld on but the heir never declared where required. Those are questions for the Israeli side of a cross-border pair, and they are mapped on the pages linked above. For most heirs the accounting that is open is the American one.

What to gather this week

The correction is a professional's job, in the sense that a cross-border CPA or tax attorney should choose the path and write the statement. But the professional works from what the heir can reconstruct, and most of it is reconstructable in a week.

The date of death and the date each transfer landed in a US account, from bank records. The amount of each transfer in dollars on the day it arrived. The succession or probate order and the estate distribution, which together show the money was a bequest and not a gift, since Form 3520 asks. A copy of the US return for the year of receipt and each year since, and the name of whoever prepared them. The Israeli account statements for every year the account was open after death, showing balances and interest. Any correspondence with the preparer about the inheritance, including the absence of any. And a written timeline, in the heir's own words, of when the filing requirement was first understood and how, because that date is the hinge of the whole statement.

Then the heir decides which of the three heirs above they are, and calls someone who does this for a living, before the IRS does the calling.

The Form 3520 penalty was never large because the IRS was cruel. It was large because for ten years the agency let a machine decide, and the machine did not read. Since October 2024 someone reads. The heir who comes forward now, with a dated account of what happened, is asking to be read by that person. The heir who waits is asking to be found by the machine that still runs on every other form.