Tax Law Center Blog

The IRS’s Inflexible Stance Discourages Good Faith Compliance

The requirement for U.S. persons to report large foreign gifts via Form 3520 is well-known, as is the steep penalty for failure to file: the greater of $10,000 or 25% of the gift’s value. What is less clear, and increasingly litigated, is the IRS’s narrow and seemingly punitive interpretation of the only defense: reasonable cause.

Penalties are intended to encourage voluntary compliance, yet the IRS’s rigid policy regarding Form 3520 is having the opposite effect. Recent cases highlight how even good-faith efforts by taxpayers are being dismissed, forcing costly legal battles where penalty abatement should have been granted administratively.

The IRS’s Unreasonable Standard

The legal defense for abatement rests on demonstrating that the failure to file was due to reasonable cause and not willful neglect. Traditionally, this included good-faith reliance on a competent professional’s advice. However, the IRS is actively challenging this defense:

• Reliance on a Professional (Wrzesinski): In the “Polish Lottery Case,” a taxpayer who consulted his accountant twice regarding substantial foreign gifts was incorrectly advised that no reporting was necessary. The IRS initially demanded a significant penalty, only conceding the case in 2023 after the taxpayer was forced to file a refund suit in District Court.
• Reliance on Tax Software (Huang v. United States): In the ongoing Huang case, the taxpayer who relied on consumer tax preparation software to file correctly was still penalized. The District Court’s refusal to dismiss the taxpayer’s refund claim (May 2025) underscores the judicial willingness to scrutinize the IRS’s rigid application of the rules.

These actions send a message to taxpayers: compliance, even when attempted diligently and in good faith, or when corrected voluntarily, may still lead to high, automatically assessed penalties. The current policy punishes the taxpayers the system should be encouraging to come forward.

Protecting Your Clients from Undue Penalties

Given the IRS’s uncompromising posture, tax professionals must treat every Form 3520 obligation as a potential risk. To protect your clients:

1. Elevate Documentation: Ensure meticulous documentation of the client’s reporting efforts and the professional advice received, anticipating that this record will be the sole basis for a reasonable cause defense in a penalty abatement request or subsequent litigation.
2. Specialized Counsel is Critical: The complexity of IRC § 6039F and the IRS’s aggressive penalty enforcement demand the expertise of legal counsel specializing in international tax procedure and controversy.

The IRS’s current policy does not advance fairness; it only creates a needless trap for the unwary and the diligent alike.

Need Help Navigating a Form 3520 Penalty Abatement?

If your client has been unfairly penalized for a foreign gift reporting failure, or if you require specialized counsel to proactively address complex international compliance risks, our firm offers the experienced legal defense needed to resolve these high-stakes matters. Contact us for a confidential consultation and let us help you protect your client from undue penalties.