Form 3520 Penalty Abatement: How to Get a Foreign Gift or Trust Penalty Reduced or Removed

You receive a generous gift or inheritance from family abroad. Generally, no U.S. income tax is due on it, and you have no idea a form exists. A year or two later you learn about the requirement, file the paperwork to fix it, and get a penalty notice for tens or hundreds of thousands of dollars.

Relief is possible. The process for asking the IRS to reduce or remove that balance has gotten meaningfully better since late 2024, which makes Form 3520 penalty abatement a realistic goal in a lot of these cases.

If you’re not sure whether you needed to file Form 3520 at all, start by reviewing your reporting obligations. If you already filed late and you’re staring at the bill, here’s what the Form 3520 penalties actually are, what reasonable cause requires, where the court fights stand, and how to appeal.

What Are the Form 3520 Penalties?

There’s no single number or percentage that applies across the board. The form covers four separate reporting duties, and each one carries its own penalty math.

Part IV works differently from the rest. It builds month by month, and there’s no $10,000 floor.

Continuation penalties can make any of this considerably worse. If your noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply, an additional $10,000 applies for each 30-day period. For the trust-related penalties under IRC Section 6677, the initial and continuation penalties combined can’t exceed the gross reportable amount.

It helps to keep the two statutes straight. Trust reporting penalties come from Section 6677; the large foreign gift penalty comes from Section 6039F. The IRS publishes the full breakdown of international information reporting penalties, but the first thing to pin down is which part of IRS Form 3520 you actually missed.

Why a Form 3520 Penalty Can Dwarf the Tax You Owe

Foreign gifts and inheritances generally aren’t taxable income to the recipient. Form 3520 is an information return. So the usual outcome of a missed filing is a very large penalty sitting next to zero unpaid tax, which is what makes these cases feel so unfair. Most IRS tax penalties at least track a balance you didn’t pay. This one doesn’t.

The enforcement numbers are hard to ignore. According to an August 2023 National Taxpayer Advocate blog post, the IRS assessed more than 3,700 Section 6039F penalties against individual taxpayers between 2018 and 2021, totaling over $844 million. The average came to roughly $226,000. And 89% of those assessments landed on taxpayers with total positive income under $400,000.

Your Form 3520 filing requirements turn on annual aggregate thresholds, not on the size of any single transfer. You have to report if you receive more than $100,000 in a year from a nonresident alien individual or a foreign estate. A much lower, inflation-indexed threshold applies to gifts from a foreign corporation or partnership: $20,116 for 2025 and $20,573 for 2026. A foreign gift from a living relative and a foreign inheritance from an estate are treated the same way here. Both carry the same Form 3520 reporting duty, and the same exposure if you miss it.

What Changed in 2024: The IRS Now Reads Your Reasonable Cause Statement First

For years the sequence was punishing. You’d file late, get assessed automatically, and only then fight for Form 3520 penalty relief.

In October 2024, the IRS announced it would review reasonable cause statements attached to late-filed Forms 3520 and 3520-A before assessing a penalty. Its delinquent international information return submission procedures page now reflects that order for these two forms specifically.

So does that mean the penalty is off the table? Not quite.

This is administrative policy, not a change to the statute. Sections 6677 and 6039F are untouched, and the IRS keeps full authority to assess. If your explanation doesn’t hold up, the penalty still lands. The National Taxpayer Advocate welcomed the change anyway, because it gives taxpayers a real shot at IRS penalty relief before the damage is done. The practical takeaway is simple: never file a late form without a reasonable cause statement attached.

What Counts as Reasonable Cause for a Form 3520 Penalty?

The standard asks you to show two things: that you exercised ordinary business care and prudence but still couldn’t comply, and that the failure wasn’t willful neglect. The IRS decides reasonable cause penalty abatement case by case, on all the facts and circumstances.

What Tends to Help

• You relied on a qualified tax professional who knew about the foreign gift or trust and never flagged the filing requirement.
• You were a first-time filer facing an unfamiliar U.S. reporting system, a recent immigrant or a new green card holder, for instance.
• Something outside your control got in the way: a slow foreign probate, a trustee who sent statements late, records in another language.
• Serious illness or a death in the family hit during the filing window.
• You filed as soon as you learned about the requirement, and you can prove the dates.
• Your compliance history is clean, and you reported the underlying income all along.

What the IRS Rejects

Some arguments sound perfectly reasonable and still go nowhere. Knowing which ones saves you time and money.

Foreign secrecy laws won’t save you. The Instructions for Form 3520 state plainly that a foreign country’s penalties for disclosing the required information aren’t reasonable cause. The same goes for a foreign fiduciary’s reluctance to hand over information, and for trust provisions that block disclosure.

Lack of knowledge, standing alone, generally doesn’t qualify for penalty relief for reasonable cause, though it can carry weight alongside stronger facts. And pointing out that no tax was owed is true but beside the point. The obligation is to file.

A strong statement lays out a factual chronology: when the gift or distribution happened, when you learned about the requirement, what you did next. Explain why the failure occurred, describe what you fixed, and attach documents backing up each date. Write it as a narrative of facts rather than a legal brief. That’s what reasonable cause for IRS penalty abatement looks like in practice.

Does First-Time Penalty Abatement Apply to Form 3520?

Taxpayers ask about this constantly. Generally, the answer is no.

First-Time Abate applies only to failure-to-file, failure-to-pay, and failure-to-deposit penalties, and it excludes returns with event-based filing requirements. Form 3520 is exactly that kind of return. The IRS is now replacing First-Time Abate with Automatic Exemption from Penalty (AEP), which covers those same three penalty types on returns like Forms 1040, 1065, and 1120. Form 3520 isn’t within the categories AEP covers.

That leaves reasonable cause as the real path here. General IRS penalty abatement programs and administrative penalty relief have their place, but building your case on first-time relief spends your one good shot on a route that doesn’t reach Form 3520.

Where the Courts Stand: Farhy, Zhang, and the Reliance Defense

Taxpayers often look to recent rulings hoping a judge has wiped these penalties off the books. The picture is more complicated than the headlines suggest.

Can the IRS Even Assess These Penalties?

In 2023, the Tax Court held in Farhy v. Commissioner that the IRS lacked authority to assess penalties under Section 6038 for failing to file Form 5471. Taxpayers facing a Form 3520 penalty hoped the reasoning would carry over. It hasn’t. The D.C. Circuit reversed Farhy in 2024, and the Second Circuit reached the same conclusion in Safdieh v. Commissioner in February 2026.

For Form 3520 specifically, a federal district court in California held in Zhang v. IRS (May 2026) that the IRS does have authority to assess Section 6039F foreign gift penalties. The court pointed to the statute’s own language, which directs that the penalty be paid “upon notice and demand by the Secretary and in the same manner as tax.”

Worth understanding, then. But it isn’t a way out of a foreign gift penalty right now, and building your strategy around it is a gamble.

Can You Blame Your Accountant, or TurboTax?

Under longstanding Supreme Court law, handing your return to someone and assuming they’d file it on time isn’t reasonable cause. Relying on a professional’s substantive advice that no filing was required can be, provided the adviser was competent for that question, you gave them the full facts, and you relied in good faith.

Tax software is the open question. In Huang v. United States, a district court let a reasonable cause claim built on TurboTax’s guidance survive a motion to dismiss in 2025. That’s a pleading-stage ruling, not a decision that the defense wins. In Zhang, the government is arguing hard against the same theory. If your reasonable cause story rests on software, treat it as unsettled and document everything.

How to Appeal a Form 3520 Penalty

If you’re holding a notice demanding $250,000, you need to know how to push back. Form 3520 penalties are assessable penalties, which means there’s no notice of deficiency and no chance to petition the Tax Court before the penalty hits your account. The first thing most people see is a CP15 notice (individuals) or a CP215 (businesses), and it generally gives you 30 days from the date printed on it.

You can appeal IRS penalties of this kind, but the path runs in a specific order.

1. Read the notice and calendar the deadline. Go by the date on your own notice. Confirm which part of Form 3520 and which tax year the IRS penalized, because that determines which arguments even apply.
2. Respond in writing before the deadline. Send a reasonable cause statement with a chronology and supporting documents. If you already submitted one with the late form, expand it and resend it rather than simply repeating it.
3. Take it to the IRS Independent Office of Appeals. The penalty appeal process reviews your case separately from the compliance function and weighs the hazards of litigation. This is where large penalties often get reduced or conceded.
4. Consider a Collection Due Process hearing. Once collection notices start, a CDP request routes you to a settlement officer and, failing that, to the U.S. Tax Court. Weigh the trade-off: it can take months or years, and a federal tax lien may hit your record in the meantime.
5. Pay, then sue. After paying in full, you can file a refund claim on Form 843, the form used for penalty abatement and refund requests. If the IRS denies the claim or sits on it for six months, you can file suit in federal district court or the Court of Federal Claims.

One note on interest: the IRS won’t abate it for reasonable cause on its own. But when a penalty is reduced or removed, the related interest comes down with it automatically.

Tip: These deadlines are short, and your options narrow fast. If a penalty notice has landed on your desk, schedule a confidential consultation with our tax attorneys and start building your response now.

Filing a Late Form 3520 the Right Way

If you haven’t been penalized yet, you still have room to handle this properly.

• Work out which parts apply. A trust distribution belongs in Part III, not Part IV. A distribution isn’t a gift, and getting this wrong creates a penalty calculation that’s harder to unwind than the original problem.
• Report the correct value. The penalty base is the amount shown on the form.
• Attach a reasonable cause statement. Under current IRS practice, that statement gets read before a penalty is assessed. A late form with no explanation throws the opportunity away.
• Know where to mail Form 3520. Send it to Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, and keep certified mail proof. The form is filed separately from your income tax return, even though the Form 3520 due date normally matches it.
• File it even if you’re very late. If a complete Form 3520 isn’t filed by the due date including extensions, the assessment period for tax related to the information required in Parts I through III doesn’t expire until three years after that information is reported.

If the missed Form 3520 is part of a bigger picture, unreported foreign income, missed account reports, a standalone late filing may not be the right route. The Streamlined Foreign Offshore Procedures, the Streamlined Domestic Offshore Procedures, and the IRS Voluntary Disclosure Program each fit a different fact pattern, and each offers a different level of offshore disclosure penalty relief. What you shouldn’t do is attempt a quiet disclosure, quietly submitting old forms outside any official program and hoping nobody looks.

One Missed Form Is Rarely the Whole Problem

If a foreign trust or a large foreign gift went unreported, related obligations usually did too. An FBAR may be missing. So may Form 8938 or Form 5471. And when a foreign trust with a U.S. owner never filed Form 3520-A, that owner may need to attach a substitute Form 3520-A to their own Form 3520.

Filing only the missing Form 3520 can draw attention to the accounts and entities sitting behind it. The IRS cross-references international information returns. Fixing one form while leaving the rest open is how a manageable problem turns into a tax audit.

If you’re chasing FBAR penalty relief, or you’re an expat trying to untangle several years of Form 3520 filings, start with a full review of your foreign footprint rather than a single form. U.S. expat taxes rarely involve just one obligation.

Facing a Form 3520 Penalty? Let’s Talk.

At Gordon Law, we start with the notice and the transfer behind it. We work out which part of the form and which statute is in play, build the reasonable cause statement and the record that supports it, handle Appeals, and look at your full offshore picture rather than one form in isolation.

Our tax attorneys have handled foreign reporting and offshore disclosures, and we’ve focused on international tax matters since 2012. Deadlines on these notices are short, and your options narrow as they pass. Don’t wait for the IRS to start collection.

If you’re seeking Form 3520 penalty relief, our international tax attorneys are ready to review your notice and tell you where you stand.

Schedule a confidential consultation and let’s get your Form 3520 penalty abatement sorted out.