Form 3520 Penalties Explained — And How to Fight Back

6 min read

You didn’t know you needed to file a form. No tax was owed. No income was hidden. And yet the IRS has assessed a penalty of tens of thousands of dollars — or more. This is the jarring reality that many taxpayers face with Form 3520 penalties.

Form 3520, the annual return to report transactions with foreign trusts and receipt of certain foreign gifts, carries some of the harshest penalties in the U.S. tax code relative to the underlying obligation. At Segal, Cohen & Landis (SCL), we defend clients against Form 3520 penalties regularly — and in this guide we’ll explain exactly how the penalty system works, what defenses exist, and how to fight back.

What Triggers Form 3520 Penalties?

Form 3520 penalties are triggered by failure to file when required, late filing, or incomplete or inaccurate reporting. The three most common penalty scenarios we see are:

1. Unreported foreign gifts: You received gifts from foreign individuals totaling more than $100,000 in a year and did not file Form 3520. This is the most common scenario among our clients.
2. Unreported foreign trust transactions: You received distributions from, or transferred assets to, a foreign trust and did not file. See our foreign trust reporting page for details.
3. Late or incomplete filing: You filed Form 3520 but missed the deadline, filed an incorrect version, or omitted required information.

How Much Are Form 3520 Penalties?

The penalty structure depends on the violation type:

Violation Type	Penalty	Maximum
Late/unfiled — foreign gifts	5% of gift value per month	25% of gift
Late/unfiled — foreign trust distributions	35% of distribution	No statutory cap
Late/unfiled — transfers to foreign trust	35% of transfer value	No statutory cap
Failure to report trust ownership	5% of trust assets per year	Ongoing annual

For reference: a $500,000 unreported gift results in a potential penalty of $125,000. A $1,000,000 distribution from a foreign trust could trigger a penalty of $350,000 — with zero underlying tax liability in many cases.

How to Fight Form 3520 Penalties: Your Defenses

Several defenses and procedures exist to reduce or eliminate Form 3520 penalties. The right approach depends on your facts: how many years were missed, whether the IRS has already assessed penalties, and whether your failure to file was truly innocent.

1. Reasonable Cause Defense

The IRS will waive Form 3520 penalties if you demonstrate reasonable cause — meaning you exercised ordinary business care and prudence but were nonetheless unable to meet the filing obligation. This defense applies even after penalties have been formally assessed.

Strong reasonable cause arguments include: reliance on a tax professional who failed to advise you of the requirement; being a recent immigrant unfamiliar with U.S. international tax reporting rules; treating the transfer as a loan rather than a gift; or filing all other required tax forms on time and in good faith.

2. Delinquent International Information Return Submission Procedure (DIIRSP)

This IRS procedure allows taxpayers who have not been contacted by the IRS to file delinquent Forms 3520 with a reasonable cause statement attached. If accepted, penalties are not assessed at all — the cleanest possible outcome for innocent non-filers.

3. Streamlined Filing Compliance Procedures

Designed for non-willful non-compliance, the Streamlined Domestic Offshore Procedure (SDOP) typically results in a 5% miscellaneous offshore penalty — far less than the Form 3520 penalties that would otherwise apply. The Streamlined Foreign Offshore Procedure (SFOP) is available to non-U.S. residents and carries no miscellaneous penalty at all.

4. IRS Voluntary Disclosure Program (VDP)

For cases where non-compliance may have been willful, the IRS Voluntary Disclosure Program provides IRS-confirmed protection from criminal prosecution in exchange for structured compliance — often the best option when the stakes are highest.

5. Formal Penalty Abatement After Assessment

If penalties are already assessed, you can still contest them via Form 843 (Claim for Refund and Request for Abatement), IRS Independent Appeals, or — in the strongest cases — Tax Court petition. Courts have ruled for taxpayers in Form 3520 penalty disputes based on reasonable cause.

What IRS Notices Are Associated With Form 3520 Penalties?

The most common notices include CP15 / CP215 (initial penalty assessment), Letter 3012C (requesting missing Form 3520 information), and CP2000 (cross-referencing FBAR and bank data). If you receive any of these, do not ignore them — response deadlines are strict. For more on Form 3520 requirements, see our Form 3520 attorney overview.

Frequently Asked Questions

Can the IRS really penalize me if I owe no tax?

Yes. Form 3520 penalties apply for failing to file the information return regardless of whether any income tax is owed. The penalty is based on the gift value, not on unpaid tax.

How far back can the IRS go?

The statute of limitations is generally 3 years from filing. But if no Form 3520 was filed, the clock never starts — meaning the IRS can potentially assess penalties for any year a required form was missing. This is why proactive disclosure matters.

I already paid the penalty. Can I get a refund?

Yes — if you have a valid reasonable cause argument, you can file Form 843 requesting a refund. The deadline is generally 2 years from payment or 3 years from the original return filing date, whichever is later.

Facing Form 3520 Penalties? We Can Help.

Form 3520 penalty defense is a specialized area of international tax law. At Segal, Cohen & Landis, our international tax attorneys have successfully obtained penalty abatement for clients from China, Japan, India, the UK, and beyond. Whether you’ve just received an IRS notice, are preparing a late filing, or have paid a penalty you believe was wrongly assessed — call us at (818) 986-3300 for a consultation.