IRS Form 3520 Penalties: What They Are and How to Qualify for Relief

Federal tax law has long required taxpayers to report their receipt of foreign gifts and inheritances and certain transactions with foreign trusts on IRS Form 3520. Although the IRS aggressively enforces this information return obligation, taxpayers understandably miss the filing deadline due to a litany of reasons. Indeed, a common reason for missing the deadline often is a general unawareness of the filing obligation itself. This article provides a summary of the IRS Form 3520 filing requirement and offers guidance to taxpayers who may have missed the filing deadline.

Who Must File IRS Form 3520?

The IRS Form 3520 is a dual-purpose information return. Generally, U.S. persons must report foreign trust transactions (on Parts I through III of the form) and their receipt of foreign gifts and inheritances over specified threshold amounts (on Part IV of the form).

To have an IRS Form 3520 reporting obligation, the taxpayer must be a “U.S. person.” In addition to domestic entities, trusts, and estates, such persons include U.S. citizens, “green-card holders,” and individuals who meet the specific residency requirements under the Internal Revenue Code.

If the taxpayer meets the U.S. person requirement, almost any transaction that person has during the tax year with the foreign trust will qualify for reporting. For example, contributions to and distributions from a foreign trust are reportable, regardless of the amount at issue. Additional reporting rules apply if the U.S. person is treated as the grantor or owner of a foreign trust under the grantor trust rules.

Independently, a U.S. person also has an IRS Form 3520 reporting obligation if the person receives, in the aggregate, more than $100,000 from a foreign individual (as a gift) or a foreign estate (as an inheritance). Reduced reporting thresholds apply if a gift is made through a foreign entity.

What are the Penalties for a Late IRS Form 3520?

U.S. persons who fail to file a timely and accurate IRS Form 3520 risk significant civil penalties. The amount of the penalty depends on whether the reporting delinquency related to a foreign trust transaction or the receipt of a foreign gift or inheritance.

Concerning foreign trust transactions (e.g., contributions to or distributions from a foreign trust), the IRS may impose civil penalties equal to the greater of $10,000 or 35% of the amount in question. For example, if a U.S. person receives a $1 million distribution from a foreign trust and fails to timely file an IRS Form 3520, the agency may impose a $350,000 penalty. There is a separate late-filing penalty that may apply to U.S. persons who are treated as the grantor or owner of a foreign trust under the grantor trust rules. In these instances, the IRS may impose civil penalties equal to the greater of $10,000 or 5% of the amount of the value of the foreign trust at the end of the tax year applicable to the grantor (the information return here is also IRS Form 3520-A).

With respect to foreign gifts and inheritances, the IRS may impose civil penalties equal to 5% of the amount of the foreign gift or inheritance on a per month basis until the IRS Form 3520 is filed (not to exceed 25% total). Accordingly, if a U.S. person receives a foreign gift of $1 million and fails to file the IRS Form 3520 within five months of the deadline, the IRS may impose civil penalties against the person in the amount of $250,000.

When are the IRS Form 3520 Filing Deadlines?

To the surprise of many, the IRS treats the IRS Form 3520 as a stand-alone information return. Therefore, IRS guidance indicates that the information return must be filed separately from the income tax return with the agency’s office in Ogden, Utah.

Generally, the IRS Form 3520 filing deadline coincides with the applicable income tax return deadline for the taxpayer. Thus, if a U.S. person has an April 15 income tax return deadline, the IRS Form 3520 must be filed on or before April 15. On the other hand, if a U.S. person files a valid and timely extension, the extension date is also the IRS Form 3520 filing deadline (generally, October 15, for individuals physically present in the U.S.).

How Does the IRS Assess IRS Form 3520 Late-Filing Penalties?

IRS Form 3520 penalties—indeed, most international information return penalties—are unique from other penalties. The penalties are not subject to deficiency procedures, permitting the IRS to immediately assess the penalties without permitting the taxpayer an opportunity to contest the merits of the penalty determination pre-assessment through judicial means.

The IRS does permit post-assessment appeals review with the IRS Independent Office of Appeals (IRS Appeals). Unfortunately, the agency also takes the position that providing IRS Appeals rights post-assessment but before issuance of a Collection Due Process (CDP) proceeding precludes taxpayers from challenging the merits of a penalty abatement request. The IRS’s argument derives from Treasury Regulation § 301.6330-1(e)(3), Q&A2, and has been a topic of discussion with the Taxpayer Advocate Service.

What Should I Do If I Missed the IRS Form 3520 Filing Deadline?

Taxpayers who discover a missed IRS Form 3520 filing have options.

First, it is important to note that the IRS recently changed their method for assessing penalties for late-filed IRS Forms 3520. Prior to 2025, the agency automatically assessed penalties upon receipt of the late information return. Taxpayers who were assessed penalties could challenge the penalty determination by filing a protest with IRS Appeals. However, under current procedures, the IRS has indicated that it no longer assesses these penalties automatically and will therefore consider reasonable cause statements that accompany the delinquent information return. Based on these recent changes, taxpayers are almost always better off in submitting a good reasonable cause statement to try to avoid imposition of penalties. Whether a taxpayer has reasonable cause depends on the facts and circumstances, but common defenses include reliance on a tax professional, death or illness in the taxpayer’s immediate family, and ignorance of the law.

Similar to its prior procedures, taxpayers who are assessed late-filing penalties are permitted an opportunity to contest the penalty determination by submitting a protest to IRS Appeals. The penalty notices usually provide the information necessary to submit a protest. During the appeals conference, an IRS Appeals officer reviews the case file and the taxpayer’s protest. In many cases, the IRS Appeals officer may have follow-up questions or requests for clarification regarding statements made in the protest. In some instances, the IRS Appeals officer may ask for documents to prove the statements made in the protest. In determining whether to concede some or all of the penalties, the IRS Appeals officer analyzes the information and proposes an offer based on “hazards of litigation.” If the taxpayer agrees with the proposed settlement, documents are signed and the case concludes.

Alternatively, if IRS Appeals and the taxpayer can’t reach an agreement, the penalties are sustained. At this point, the taxpayer can continue to challenge the penalties by paying them in full, filing an administrative refund request, and eventually filing a petition in the appropriate federal court.

On the other hand, some taxpayers may avoid the entire process above if they qualify for IRS programs. A common program aimed at delinquent international information returns and unreported foreign income is the Streamlined Filing Compliance Procedures (SFCP). In the right circumstances, the SFCP can significantly reduce or eliminate late-filing penalties associated with a delinquent IRS Form 3520. But taxpayers should be mindful that their conduct must be “non-willful” and that taxpayers lose eligibility to participate in the program if the IRS initiates an examination.

Summary

U.S. persons with foreign trust transactions or the receipt of foreign gifts and inheritances generally fall within the scope of the IRS Form 3520 filing obligation. The failure to timely file this information return can result in significant civil penalties and headaches. Nevertheless, taxpayers should be aware that there are options to remedy a delinquent filing including through traditional reasonable cause defenses or alternative IRS programs.

For questions concerning this blog post or any other IRS civil or criminal matter, please contact me at mroberts@meadowscollier.com.