Tax Law Center Blog

The IRS has made it clear that Form 3520 compliance is an area of aggressive enforcement for taxpayers who receive foreign gifts, inheritances, or engage with foreign trusts. Unfortunately, many taxpayers learn about these harsh penalties only after receiving a notice, often with no opportunity to correct innocent mistakes.

When a U.S. person receives a foreign gift or inheritance exceeding $100,000, they are required to file Form 3520. Failure to file, or filing incorrectly, can result in automatic and substantial penalties. As we explain in Foreign Gifts and the Uncommon Form 3520: A Trap for the Unwary, these penalties can amount to 25% of the amount received, even when no U.S. tax is due on the gift itself.

The reporting burden is even greater for those involved with foreign trusts. Taxpayers who own or transact with a foreign trust must also file an annual Form 3520-A, and as highlighted in Welcome News from IRS for Late Form 3520 Penalties, the IRS recently announced changes to reduce duplicative penalties. Under these new guidelines, taxpayers no longer face overlapping penalties for late filing of both Forms 3520 and 3520-A in certain cases.

Despite this modest relief, the underlying penalties remain significant. The IRS imposes a 5% penalty per month, up to 25% of the value of the foreign gift, inheritance, or trust assets, as described in IRS Issues New Proposed Regs on Information Reporting on Foreign Gifts. These penalties are often issued automatically, with little consideration of a taxpayer’s intent.

Fortunately, taxpayers with reasonable cause may seek penalty abatement. In Fantastic Recommendations for Form 3520, we discussed how professional groups like the AICPA have pushed for clearer abatement procedures and protections for taxpayers who made honest mistakes. Similarly, filing through the Delinquent International Information Return Submission Procedures (DIIRSP) remains a viable option for taxpayers who qualify and can demonstrate reasonable cause.

Encouragingly, courts are also beginning to scrutinize the IRS’s aggressive stance. As explained in Foreign Gift Received? Form 3520 Penalties Eliminated in New Court Case, recent litigation resulted in significant penalties being overturned for a taxpayer who successfully argued reasonable cause for their filing deficiencies.

Of course, even minor reporting errors can trigger further IRS scrutiny. Our team recently examined how Part IV of Form 3520, which requires detailed disclosure of donor information, can be a key audit trigger in Navigating IRS Form 3520 Part IV for Audit Scrutiny. That is why accuracy and professional guidance are critical when preparing these forms.

Finally, as highlighted in Comments on IRS Form 3520 to Report Foreign Gifts, tax professionals continue to advocate for more clarity, greater procedural fairness, and expanded relief for taxpayers caught in this harsh enforcement net.

The penalties for failing to properly file Form 3520 can be devastating. However, with proactive legal counsel, many taxpayers can avoid penalties altogether or successfully challenge them. At Patel Law Offices, we help clients navigate these complex rules, prepare filings, seek penalty relief, and defend against improper penalties.

If you have received a foreign gift, inheritance, or have foreign trust interests, we strongly recommend addressing your Form 3520 obligations immediately.