Tax Law Center Blog

For tax professionals managing international compliance, few issues carry higher high-stakes risk than a late-filed or incomplete Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Historically, the IRS’s automated, system-rendered penalties under Internal Revenue Code Section 6677 and Section 6039F have created immediate administrative nightmares. IRS assessments regularly catch practitioners and their clients by surprise, triggering lengthy, costly abatement battles rooted in reasonable cause defenses.

However, the IRS Internal Revenue Manual (IRM) updates effective October 1, 2025, specifically to IRM 21.8.2.19.2 paragraphs (15) and (24), mark a notable shift in how the IRS handles late-filed international information returns at the processing level. Understanding these precise internal operational guidelines is critical for tax professionals aiming to protect their clients from automatic penalty assessments.

The Procedural Shift: IRM 21.8.2.19.2(15) and (24)

The updated sections of the manual provide refined operational logic for IRS examiners during the initial screening and processing phases of late returns. Crucially, these updates alter the default mechanics of immediate assessment, giving practitioners a clearer roadmap for securing administrative relief before the collection cycle begins.

The updates address two primary vulnerabilities in the standard compliance workflow:

1. System-Generated Assessment Suppression: The manual guidance now directs campus personnel to review specific gating criteria before allowing systemic, computer-generated penalties to post. If the submission meets precise baseline standards or if it is submitted under specific, sanctioned administrative programs, examiners are instructed to hold or suppress the automatic calculation of the asset-based penalties (which can reach up to 35 percent of the gross reportable amount).
2. Standardizing the First-Line Review: Paragraphs (15) and (24) create a more uniform criteria for identifying returns that require immediate field referral versus those that can be resolved via “no action” at the campus level. By formalizing what constitutes a facially valid reasonable cause statement attached to a late Form 3520, the IRM effectively allows processing clerks to close certain cases without asserting a penalty, rather than forcing the taxpayer into the standard Post-Assessment Appeals track.

The “No Action” Landscape: Strategic Parameters for Practitioners

The core value of these updates for tax practitioners lies in the specific conditions under which the IRS will choose to take “no action” regarding penalty imposition. To position a client for this streamlined relief, the filing must be handled with precise procedural hygiene.

• Facial Sufficiency of the Reasonable Cause Statement: Simply checking a box or attaching a generic note referencing an oversight will no longer suffice, nor will it satisfy the updated screening parameters. The reasonable cause statement attached to the late Form 3520 must establish clear ordinary business care and prudence. It should explicitly trace the timeline of non-compliance, detail the specific impediments that prevented timely filing, and show that no willful neglect occurred. If this statement is structurally complete and matches the data on the return, the updated IRM provisions allow for immediate relief at the point of processing.
• Coordination with Main Return Filings: The IRS screening process under the revised manual places a higher emphasis on systemic alignment. Practitioners must ensure that any foreign income related to the Form 3520 transactions is accurately reflected on the taxpayer’s Form 1040 or Form 1041. When the processing system verifies that no tax deficit or underreporting exists alongside the information return failure, the threshold for a campus-level “no action” determination decreases significantly.

Proactive Defense: How to Utilize the New IRM Rules

The October 2025 IRM revisions provide a powerful tool, but they require practitioners to shift from a reactive post-assessment posture to an aggressive pre-assessment posture. When preparing a late Form 3520 submission, consider the following implementation strategies:

• Incorporate Direct IRM Citations: When drafting the reasonable cause disclosure to accompany the late form, explicitly reference IRM 21.8.2.19.2(15) and (24). Instruct the processing examiner to review the attached documentation under the parameters of these specific paragraphs to determine if a “no action” closure is warranted prior to systemic assessment.
• Document the Footprint of Compliance: Ensure that the submission packet includes undeniable proof of compliance in all other domestic tax areas. Demonstrating a pristine domestic filing history reinforces the argument of ordinary business care and prudence, aligning directly with the internal evaluation checkboxes now utilized by campus personnel.
• Expect a Penalty: Regardless of advocacy, still expect a possible penalty assessment, and be ready for subsequent appeals.

Partner with Specialization

While the updated IRM guidelines offer a clearer path toward administrative resolution, international penalty defense remains an intricate and unpredictable area of tax controversy. Navigating the intersection of automated IRS campus processing and evolving international compliance mandates requires continuous vigilance.

If you are currently managing a complex late-filing scenario, or if your client has already received a notice of assessment for a foreign trust or gift transaction, we are here to assist. Our firm specializes in high-stakes tax controversy and international procedural defense.