Form 3520 late filing penalty relief: abatement, reasonable cause, and what to do next

Quick answer

• Form 3520 late filing penalties can be severe – up to 25% of an unreported foreign gift or bequest, or up to 35% of unreported foreign trust transactions.
• Relief may still be possible – since October 2024, the IRS has said it will review a reasonable cause statement attached to a late-filed Part IV form before manually assessing a penalty, but the penalty can still be assessed if the explanation is not accepted.
• First-time penalty abatement for Form 3520 is usually not the right primary framework – reasonable cause is the more reliable and legally grounded path.
• The right approach depends on what you missed – a foreign gift or inheritance (Part IV) and a foreign trust reporting obligation (Parts I–III) follow different penalty rules and different relief paths.

What is the penalty for filing Form 3520 late?

The Form 3520 penalty is not a single number – it depends entirely on which part of the form you failed to file or filed late, with individual penalties reaching as high as 35% of the total value of the transaction you didn't report (IRC § 6677). Because Form 3520 covers four distinct categories of reportable events, the IRS applies a different formula to each one.

Part I covers transfers you made to a foreign trust. If you moved assets into a foreign trust and didn't report it, the penalty is the greater of $10,000 or 35% of the gross value of the property you transferred – and the total penalty for the failure year cannot exceed the gross reportable amount (IRC § 6677(a)).

Part II applies when you are treated as the owner of any portion of a foreign trust under the grantor trust rules in IRC §§ 671–679. Creating or funding the trust may be part of that analysis, but it is not the only way owner status can arise. The penalty is the greater of $10,000 or 5% of the gross value of the portion of trust assets you're treated as owning at the close of the tax year (IRC § 6677(b)).

Part III covers distributions you received from a foreign trust. A late or missing report triggers the same penalty structure as Part I: the greater of $10,000 or 35% of the gross value of the distribution, with the total penalty for the failure year capped at the gross reportable amount (IRC § 6677(a)).

Part IV works differently. It covers large foreign gifts and inheritances – for 2025, aggregate receipts over $100,000 from a foreign individual or estate, or over $20,116 from a foreign corporation or foreign partnership (IRC § 6039F). Both are annual aggregate thresholds, not per-gift amounts. Rather than a flat percentage, the penalty accrues at 5% of the gift amount for each month the failure continues, capped at 25% total.

The penalty formula differs by part. Parts I and III start at the greater of $10,000 or 35% of the reportable amount, and Part II starts at the greater of $10,000 or 5% of the relevant trust value. For Parts I–III and Form 3520-A, continuation penalties of $10,000 per 30 days can also apply after notice if the failure continues. Part IV uses a 5% monthly penalty capped at 25%.

Form 3520 Part IV late filing penalty for foreign gifts and inheritances

The Form 3520 late filing penalty for Part IV – covering foreign gifts and inheritances – is 5% of the unreported amount for each month the form is late, capped at 25% of the total gift or bequest. This penalty applies when a US person receives more than $100,000 from a foreign individual or estate, or more than $20,116 from a foreign corporation or partnership – both are annual aggregate thresholds, not per-gift amounts (2025, indexed annually) – and fails to report it on time.

The penalty for not filing 3520 in the gift context can be disproportionately large relative to the actual tax owed, which is typically zero, since foreign gifts are not taxable income. From 2018 to 2021, taxpayers with incomes under $400,000 received an average Form 3520 Part IV penalty of over $235,000, according to the National Taxpayer Advocate.

Important: As of October 24, 2024, the IRS now considers any reasonable cause statement you attach before manually assessing a penalty, giving you a real opportunity to make your case before a penalty exists, not after. The rest depends on whether the IRS finds the explanation sufficient.

Form 3520 penalties for foreign trust transfers, ownership, and distributions

Parts I, II, and III of Form 3520 cover foreign grantor trust reporting obligations and carry harsher penalties than the Part IV gift rules.

Part I – Transfer to a foreign trust: If a US person transfers $50,000 to a foreign trust and fails to report it on Form 3520, the penalty is the greater of $10,000 or 35% of $50,000 – meaning $17,500 in this example.

Part II – Foreign trust ownership: If a US person is treated as the owner of any portion of a foreign trust under IRC §§ 671–679 and fails to report it, the penalty is the greater of $10,000 or 5% of $500,000 – meaning $25,000 in this example. Continuation penalties of $10,000 per 30-day period may also apply after an IRS notice.

Part III – Distribution from a foreign trust: If a US beneficiary receives a $200,000 distribution from a foreign trust and fails to report it, the penalty is the greater of $10,000 or 35% of $200,000 – meaning $70,000 in this example.

These penalties are assessed under IRC § 6677 and are structurally more severe than the Part IV gift penalty. As of October 24, 2024, the IRS stopped automatically assessing Part IV penalties without first reviewing reasonable cause statements.

For Parts I–III and Form 3520-A, the IRS announced it would begin reviewing reasonable cause statements before assessment by the end of 2024, formalized through updates to the Internal Revenue Manual on November 20, 2024.

Can Form 3520 penalties be abated?

Yes – sometimes. Form 3520 penalty abatement is fact-dependent, and the primary concept is reasonable cause: whether the taxpayer exercised ordinary business care and prudence but still failed to file on time. Abatement is possible, but it is not automatic, and whether a penalty has already been assessed changes the procedural path.

The October 2024 IRS policy shift means that for late-filed returns, a reasonable cause statement attached to the return is now reviewed before any penalty is manually assessed – not after a notice has already been issued. Whether the penalty is ultimately imposed depends on whether the IRS finds the explanation sufficient.

Reasonable cause penalty relief for Form 3520

Form 3520 penalty relief through reasonable cause is not a vague appeal to fairness – it is a specific legal standard. The IRS asks whether you made a genuine effort to comply and whether your failure resulted from circumstances outside your control, not from carelessness or willful neglect.

The IRS evaluates reasonable cause based on the full facts and circumstances of each case. The following factors are consistently relevant across IRS guidance (IRM 20.1.1.3):

• Your efforts to comply with the filing requirement.
• The complexity of the reporting obligation relative to your tax knowledge.
• Whether you relied on the advice of a competent tax professional who was aware of all relevant facts.
• A chronology of events showing what happened and when.
• Whether you acted promptly once you discovered the error.

What does not qualify is equally important. For foreign trust reporting specifically, the IRS explicitly rejects two arguments that taxpayers commonly raise: foreign secrecy laws that purportedly prevent disclosure, and trust documents that prohibit the beneficiary from disclosing information.

Neither constitutes reasonable cause under IRC § 6677 – the IRS Instructions for Form 3520 explicitly state that foreign secrecy laws and trust provisions that block disclosure do not meet the reasonable cause and not willful neglect standard.

A strong, reasonable cause statement is specific, chronological, and documented. The quality of that written argument is often the difference between relief granted and relief denied.

Does first-time penalty abatement apply to Form 3520?

First-time penalty abatement is generally not the main relief path for Form 3520 or Form 3520-A. The IRS says FTA is generally not applicable to international penalties, which means reasonable cause is the better primary framework for most Form 3520 cases.

IRM 20.1.1.9 discusses FTA in connection with certain systemically assessed international penalties tied to late-filed income tax returns, but this does not create a simple, general FTA pathway for Form 3520 or Form 3520-A penalties.

Readers familiar with FTA as a path for income tax penalties sometimes assume it applies equally to international information reporting penalties, but that assumption is not accurate for most Form 3520 situations. The IRS has not formally extended FTA to these penalties as a standalone relief mechanism.

For most taxpayers facing a Form 3520 late filing penalty, reasonable cause is the safer and more legally grounded focal point. FTA may be worth exploring as a secondary argument in some fact patterns, but building a strategy around it as the primary path is risky.

Facing a Form 3520 penalty or filing late? A TFX specialist can review your situation

 

Learn more

What changed in 2024 for late-filed Form 3520 foreign gift reporting

On October 24, 2024, the IRS stopped automatically assessing penalties for late-filed Form 3520 Part IV. Before that date, filing late triggered an automatic penalty notice – regardless of any reasonable cause statement attached to the return.

The IRS now reviews reasonable cause statements before assessing any penalty for late foreign gift and inheritance reporting. That is a meaningful procedural shift, but the penalty can still be assessed if the explanation is not accepted – a Part IV filer with a strong argument may avoid it entirely, not automatically.

This change is specific to Part IV. It is not a blanket amnesty for all Form 3520 filings, and it does not automatically extend to trust-related penalties under Parts I–III or to Form 3520-A. The underlying penalty rules under IRC § 6039F have not changed – reasonable cause still must be demonstrated, and the IRS retains full authority to assess if the explanation is insufficient.

How to file a late Form 3520 and ask for penalty relief

The following five steps cover the full process, from preparing the return to responding if the IRS pushes back.

Step 1: Identify which parts of Form 3520 apply to your situation and gather the underlying documentation – trust agreements, gift records, inheritance documents, brokerage statements, or any correspondence that establishes the facts and timeline.

Step 2: Complete the form according to the Form 3520-A instructions and the Form 3520 instructions, reporting all required information as accurately as possible. Do not underreport in order to reduce the penalty base – this creates additional exposure.

Step 3: Attach a written reasonable cause statement to the late-filed form. File the completed package to the address specified in the form instructions.

Step 4: Understand that even with the October 2024 policy shift, penalties may still be assessed if the IRS does not find the reasonable cause statement sufficient. In that case, the taxpayer receives a penalty notice and has the opportunity to respond or appeal.

Step 5: Retain copies of everything filed, including the reasonable cause statement and any certified mail receipts. If the IRS issues a penalty notice despite a submitted reasonable cause statement, the response process begins with a written reply to that notice.

What to include in a Form 3520 reasonable cause statement

The following seven elements are consistently relevant based on IRS guidance and practice – not a fixed statutory test, but the factors that matter most in practice:

• Timeline. When did the reportable event occur? When did you learn of the filing requirement? When did you file?
• Trigger. What caused the filing obligation – a gift, an inheritance, a trust distribution, or a trust you created or transferred assets to?
• Reason for late filing. Why did the failure occur? This may include reliance on a tax professional, lack of awareness of the specific Form 3520 requirement, medical or family circumstances, or complexity of the underlying transaction.
• Steps taken upon discovery. What did you do once you learned the form was required? Prompt filing after discovery supports a good-faith argument.
• Supporting documents. Attach anything that substantiates your timeline and explanation – estate documents, professional correspondence, and medical records, if applicable.
• Statement of non-willfulness. Explain clearly that the failure was not intentional and that you were not trying to conceal the transaction or the underlying assets.
• Good faith. If you relied on a tax professional, describe that reliance specifically – who advised you, what they told you, and why you had reason to trust their judgment.

The statement should read as a factual narrative, not a legal argument. Keep the IRS reasonable cause standard in mind: the IRS is looking for specificity, honesty, and internal consistency – not legal language.

What happens if the IRS has already assessed the penalty

A penalty assessment is not the end of the road. The IRS issues a CP15 or CP215 notice stating the penalty amount and the deadline to respond. That deadline is the most important number on the page – take it directly from the notice and the accompanying IRS instructions, as it can vary.

Respond in writing with a formal abatement request. If you already submitted a reasonable cause statement with the original filing, resubmit it, expand on it, and attach any supporting documents you did not include the first time. The IRS may follow up with additional questions or requests for clarification – respond to each piece of correspondence promptly and keep copies of everything.

If the IRS has already reviewed your reasonable cause argument and denied it, the next step is the IRS Independent Office of Appeals. Appeals reviews the case independently from the compliance division. Submit a written protest to the address listed on the denial notice.

Should you use Streamlined Procedures for a missed Form 3520

It depends on whether the Form 3520 issue is part of a broader compliance gap or a standalone problem.

Streamlined Filing Compliance Procedures are built for non-willful failures across multiple international obligations – unreported foreign income, missed FBARs, and other international forms filed over several years. If a missed Form 3520 is part of that pattern, Streamlined can address everything together.

Expats living abroad use the Streamlined Foreign Offshore Procedures; US-resident taxpayers use the Streamlined Domestic Offshore Procedures. Both require a non-willfulness certification under penalty of perjury – a significant legal commitment that makes program selection consequential.

If the only issue is a late Form 3520 with no broader compliance gaps, a standalone delinquent filing with a reasonable cause statement is often the simpler and more direct path. Entering Streamlined when a standalone filing would have sufficed adds complexity without a clear benefit.

The right call depends on what else is in your filing history – and that review is where the analysis has to start.

When a late Form 3520 is just one piece of a larger offshore compliance problem

Filing only the missing Form 3520 solves one problem – but it can leave the IRS a roadmap to others. If a foreign trust or large foreign gift was never reported, the odds are high that related obligations were also missed.

Missed FBARs and foreign accounts

A US expat receives a foreign inheritance, does not report it on Form 3520, and also never files an FBAR because the inherited funds sat in a foreign account for years. Those are two separate violations – Form 3520 under IRC § 6039F and the FBAR under 31 U.S.C. § 5314 – and filing one without the other leaves the second one exposed.

Foreign trust ownership and Form 8938

A missed Form 3520 for trust ownership typically means Form 3520-A was also never filed. If the trust held financial accounts, those may trigger FBAR and Form 8938 reporting under FATCA (IRC § 6038D).

Unreported income

If a foreign trust generated income that flowed to a US beneficiary, that income may have been underreported on the Form 1040. The same applies to foreign gifts that were reinvested – any income those assets generated in a foreign account is still taxable in the US, regardless of whether the original gift was reported.

Why filing "just the form" is too narrow

The IRS cross-references international information returns. A late-filed Form 3520 that draws attention to a foreign trust or account can prompt questions about why the related forms are missing.

This is where Streamlined Procedures become relevant – not as a penalty reduction tool, but as a structured framework for addressing all related failures together, under a single non-willfulness certification, with a defined path to full compliance.

Common mistakes that make Form 3520 penalty relief harder

The following six patterns consistently complicate the Form 3520 penalty abatement process and reduce the likelihood of a successful reasonable cause argument.

Filing the wrong part. Reporting a trust distribution on Part IV (gifts) instead of Part III (distributions) – or vice versa – creates factual confusion and can result in incorrect penalty calculations that are harder to resolve.

Confusing gifts with loans. Transactions that are structured as gifts but have informal repayment expectations – or vice versa – need careful characterization before filing. Mischaracterization creates a paper trail that works against you.

Missing the threshold rules. Not all foreign gifts require Form 3520. The $100,000 threshold applies to gifts from foreign individuals and estates. A lower threshold – $20,116 in 2025, indexed annually – applies to gifts from foreign corporations or partnerships. Filing for the wrong category or not filing because the wrong threshold was used are both common errors.

Assuming no tax means no form. The most common misconception about Form 3520 is that, because foreign gifts and inheritances are not taxable income, no IRS reporting is required. The form is an information return, not a tax return. The obligation exists regardless of tax liability.

Relying on first-time abatement slogans. As discussed above, first-time abatement is not a reliable primary strategy for Form 3520 penalties. Building a case around it without developing the reasonable cause facts is a mistake that can cost time and weaken the overall submission.

Filing late without a proper explanation. Under the post-October 2024 framework, attaching a reasonable cause statement is the key step. Filing a late form with no explanation, or with a generic one-sentence statement, wastes the opportunity the new IRS policy creates.

Missed more than just Form 3520? Streamlined Procedures may be the right framework to fix everything at once.
 

Learn more

Examples: three common late Form 3520 scenarios

TFX regularly works with clients in all three of these situations – late gift filings, unreported inheritances, and foreign trust distributions that were never reported on Form 3520. The following three scenarios show how these cases typically play out: what triggered the penalty, and what the most likely relief angle looks like.

Scenario 1: Late foreign gift filing from parents abroad.

The situation: A US expat living in the Netherlands received $150,000 from her parents in Brazil in one tax year. She did not file Form 3520 because her accountant told her foreign gifts are not taxable. That is true – but it missed the key point: once gifts exceed $100,000 in a year, reporting is required even if no tax is due.

Penalty exposure: This falls under Form 3520 Part IV. The penalty starts at 5% of the unreported amount per month, capped at 25%. On $150,000, that is up to $37,500 – despite zero tax owed.

Relief angle: This is a strong reasonable cause case. The taxpayer relied on a qualified advisor who had the full picture but failed to flag the filing requirement. That kind of documented reliance can carry real weight with the IRS. Under the post–October 2024 IRS process, a reasonable cause statement submitted with the late filing is reviewed before any penalty is assessed. That creates a real opportunity to avoid the penalty entirely – but only if the explanation is specific, credible, and well-documented.

Scenario 2: Foreign inheritance reported late.

The situation: A US citizen living in Canada inherited €220,000 from a grandparent's estate in Italy. The estate took 18 months to settle, during which time he was managing the process from abroad, dealing with Italian probate, and working with a local attorney who had no knowledge of US tax reporting requirements. He filed Form 3520 Part IV two years late.

Penalty exposure: Part IV – up to 25% of €220,000, which at the time of filing translated to approximately $60,000.

Relief angle: The combination of foreign probate complexity, reliance on a foreign advisor with no US tax knowledge, and the fact that the inheritance generated no US tax liability creates a compelling, reasonable cause narrative. A detailed chronology of the probate process – with supporting documents from the Italian estate proceedings – significantly strengthens the submission.

Scenario 3: Foreign trust distribution reported late.

The situation: A US beneficiary received three annual distributions from a foreign family trust established by her grandfather in Singapore. She reported the distributions as income on her Form 1040 each year, assuming that was sufficient. Form 3520 Part III was never filed. When the full picture was reviewed, Form 3520-A had also never been filed for any of the three years.

Penalty exposure: Part III – 35% of each distribution. On three distributions totaling $180,000, gross exposure was $63,000. The missing Form 3520-A added a separate $10,000 minimum penalty per year, and an additional $30,000.

Relief angle: The fact that she reported the distributions as income each year demonstrates she was not hiding the transactions – she simply misunderstood which form covered them. That good-faith conduct, documented through her Form 1040 filings, is the foundation of the reasonable cause argument. All three delinquent Form 3520s and Form 3520-A returns can be filed together with a unified reasonable cause statement covering the full three-year period.

FREE

Missed Form 3520 – or think other forms may also be at risk?

A TFX specialist can review your situation before you file.

Schedule my free call