Tax Law Center Blog

For tax practitioners, few issues in the international tax matters carry as much penalty risk as the reporting of foreign trust transactions and large foreign gifts. Under Internal Revenue Code (IRC) § 6039F, U.S. persons must report the receipt of gifts or bequests from foreign sources that exceed $10,000 in the aggregate during a taxable year. This reporting is executed via IRS Form 3520, a document that has increasingly become a focal point for aggressive IRS penalty enforcement. We have recently seen many Form 3520 penalty cases.

As we move into 2026, the landscape for taxpayers with missed filings is fraught with significant financial exposure and complex procedural hurdles.

The Mechanics of Exposure: Penalties Under IRC § 6677 and § 6039F

The IRS does not view Form 3520 as a mere informational courtesy. Failure to timely and accurately file can trigger draconian civil penalties:

• Foreign Gifts: Failure to report a foreign gift under § 6039F can result in a penalty equal to 5% of the value of the gift for each month the failure continues, capped at 25%.
• Foreign Trusts: Under IRC § 6677, the initial penalty for failing to report a foreign trust distribution or transfer is the greater of $10,000 or 35% of the gross reportable amount.
• Continuation Penalties: If a taxpayer fails to respond to an IRS notice regarding the delinquency within 90 days, additional penalties of $10,000 per 30-day period may be assessed, subject to certain maximums.

The Procedural Trap: Assessable vs. Non-Assessable Penalties

A critical distinction for practitioners is that these are “assessable penalties,” meaning the IRS may assess and collect them immediately without the predicate of a Statutory Notice of Deficiency (SNOD). This denies the taxpayer an automatic ticket to the U.S. Tax Court for a pre-payment challenge, often forcing them into a “pay-to-play” refund litigation posture.

Strategic Considerations for Delinquent Filers

Taxpayers discovering a missed filing must choose their path very carefully. The IRS offers several remedial avenues, each with distinct trade-offs:

1. Delinquent International Information Return Submission Procedures: This path is generally reserved for taxpayers who have reasonable cause for the failure, have already reported and paid all related tax, and have not been contacted by the IRS.
2. Streamlined Filing Compliance Procedures: For non-willful taxpayers, these procedures offer a structured way to come into compliance with a significantly mitigated penalty framework.
3. IRS Voluntary Disclosure Practice (VDP): If the failure was “willful” (a voluntary, intentional violation of a known legal duty) the formal VDP provides a path to avoid criminal prosecution, though it typically requires an admission of civil fraud and the payment of a large penalty.

The Importance of Experienced Legal Counsel

Determining whether a client’s non-compliance was “willful” or “non-willful” is an exercise in nuanced legal judgment. When a client faces a potential Form 3520 delinquency, a misstep in the initial approach can transform a civil oversight into a criminal investigation. Our firm specializes in navigating these sensitive cases, ensuring that every disclosure is positioned to maximize protection and minimize penalties.

Learn more about how we can help with your international tax issues. Contact us for a professional consultation.