Form 3520 Penalties Explained — And How to Fight Back

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A taxpayer can face a substantial information-reporting penalty even when a gift produces no income tax and the taxpayer did not intend to hide income. Form 3520 penalties depend on the reporting category, applicable exceptions, filing history and facts. Read the actual notice before evaluating a response.

Form 3520 reports certain foreign-trust transactions and ownership interests, as well as specified foreign gifts or bequests. This guide explains the principal penalty provisions and potential response procedures. To discuss representation with Segal, Cohen & Landis (SCL), confirm the qualifications and scope of the proposed engagement; no particular result is assured.

What Triggers Form 3520 Penalties?

Depending on the reporting requirement, failure to file on time or to provide complete and correct information may cause a penalty. Examples include:

1. Unreported foreign gifts: A U.S. person received more than $100,000 in qualifying gifts or bequests from a nonresident alien individual or foreign estate, including applicable related-person amounts, and failed to report them. Purported gifts from foreign corporations or partnerships have a separate, annually adjusted threshold and aggregation rules.
2. Unreported foreign trust transactions or ownership: A person failed to report a covered transfer, distribution or ownership interest, after considering applicable exceptions. See our foreign trust reporting page for related information.
3. Late or incomplete filing: A required return was filed after its applicable deadline or omitted required information. Use the appropriate form and instructions; an alleged error must be evaluated under the relevant reporting and penalty rule.

How Much Are Form 3520 Penalties?

The rules below describe potential statutory penalties; reasonable-cause exceptions and applicable limits must also be considered. Current processing practices do not repeal these rules. See the Form 3520 instructions and section 6677.

Violation Type	Penalty	Maximum
Late/unfiled — foreign gifts	5% of gift value per month	25% of gift
Late/unfiled — foreign trust distributions	Initial penalty generally the greater of $10,000 or 35% of the gross reportable distribution	Initial and continuation penalties are subject to the applicable gross-reportable-amount limit under § 6677
Late/unfiled — transfers to foreign trust	Initial penalty generally the greater of $10,000 or 35% of the gross reportable transfer	Initial and continuation penalties are subject to the applicable gross-reportable-amount limit under § 6677
Failure to satisfy U.S.-owner reporting under section 6048(b), including required Form 3520-A information	Initial penalty generally the greater of $10,000 or 5% of the year-end gross value of the trust assets treated as owned by the U.S. person	Continuation penalties and the applicable gross-reportable-amount limit under § 6677 apply

For illustration, 25% of a $500,000 unreported foreign gift is $125,000. An unreported $1,000,000 foreign-trust distribution can produce an initial 35% penalty of $350,000, subject to applicable relief and limits. Under section 6677, a continuing failure after the statutory 90-day notice period can also produce $10,000 for each additional 30-day period or fraction thereof. The reporting penalty and any income tax consequences must be evaluated separately.

How to Fight Form 3520 Penalties: Your Defenses

Potential relief and response procedures depend on the penalty provision, filing and payment history, IRS contact, evidence and deadlines. Reasonable cause and the non-willfulness required by streamlined procedures are different standards; satisfying one should not be assumed to satisfy the other.

1. Reasonable Cause Defense

The relevant Form 3520 penalty provisions allow relief when the taxpayer establishes reasonable cause and absence of willful neglect. Present specific facts and supporting records explaining why the obligation was not met. A request may be made after assessment where the applicable procedure allows it, but merely asserting reasonable cause does not establish entitlement to relief.

An adviser may examine what a tax professional was engaged to do, what information and advice the taxpayer provided or received, the taxpayer’s understanding of the requirement, and steps taken to comply. Recent immigration, treating a transfer as a loan, reliance on a preparer, or timely filing other forms does not automatically establish reasonable cause. Characterize the transaction correctly and evaluate the full record.

2. Delinquent International Information Return Submission Procedure (DIIRSP)

The IRS delinquent-return procedures direct taxpayers who are not under IRS civil examination or criminal investigation and have not been contacted about the delinquent returns to use the applicable filing instructions. Form 3520 and Form 3520-A are filed under their own instructions. A reasonable-cause statement may be attached; current IRS guidance says it will be considered before assessing a penalty for those forms and instructs filers to mark the first page accordingly. Separately, the IRS ended automatic assessment at filing for late-filed Part IV foreign-gift reports in 2024. These processing changes do not eliminate reporting duties or guarantee relief from all penalties.

3. Streamlined Filing Compliance Procedures

The streamlined procedures require truthful non-willfulness certification and other eligibility conditions. The domestic procedure generally requires previously filed income tax returns for the covered years and omitted foreign-asset income and tax; it is not an automatic option for an isolated late gift report. Its 5% miscellaneous offshore penalty uses the highest applicable aggregate foreign-asset balance or value, not simply the gift amount. The foreign procedure requires its specific non-residency test and other conditions and imposes no miscellaneous offshore penalty on a qualifying submission. Both require applicable tax and interest. Current IRS examination or criminal investigation disqualifies a taxpayer, and previously assessed penalties are not automatically abated.

4. IRS Voluntary Disclosure Practice (VDP)

Where noncompliance may have been willful, discuss the current IRS Voluntary Disclosure Program procedures with an adviser. IRS Criminal Investigation considers timely, truthful and complete disclosures, cooperation, and payment arrangements when deciding whether to recommend prosecution. The practice does not guarantee immunity or removal of tax, penalties or interest.

5. Formal Penalty Abatement After Assessment

After assessment, review the actual penalty notice and available administrative or judicial remedies, including any payment, refund-claim, jurisdiction, and filing prerequisites. An information-return penalty does not automatically provide a deficiency-petition route to Tax Court; reasonable cause must be established under the applicable penalty provision.

What IRS Notices Are Associated With Form 3520 Penalties?

IRS notices have different purposes and response procedures. CP2000 generally proposes changes based on income-document matching; it is not itself a Form 3520 penalty assessment. Read the actual notice, statutory basis, and deadline, and distinguish requests for information from assessment or continuation-penalty notices. Form 3520 attorney overview

Frequently Asked Questions

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

Yes. Information-reporting penalties can apply even when no income tax is due. The foreign-gift penalty is based on covered gift amounts; foreign-trust penalties use the applicable reportable transfer, distribution or ownership value. Exceptions and current processing rules still matter.

How far back can the IRS go?

Assessment and refund periods depend on the tax or penalty, required information, filing and payment dates, and applicable exceptions or extensions. Have the actual record reviewed rather than assuming a single three-year rule covers every Form 3520 issue.

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

A refund request requires the appropriate claim procedure, supporting facts, and a timely filing under the rules applicable to the particular payment and penalty. Form 843 may be relevant, but reasonable cause alone does not establish refund eligibility or the deadline.

Facing Form 3520 Penalties? We Can Help.

If you received a Form 3520 penalty notice, are preparing a late filing, or seek a refund of a paid penalty, the international tax attorneys at Segal, Cohen & Landis can be contacted at (818) 986-3300 to discuss the matter. Bring the relevant notices, filing history and deadlines, and confirm the proposed services and fees. Prior results do not establish entitlement to relief in your case.