Form 3520 Foreign Gift & Trust Penalty: How to Fix a Late Filing

What Form 3520 Is, and Why It Bites

Form 3520 is the IRS form that reports two things, a large gift or inheritance from a foreign person and any dealings with a foreign trust. Its full name is the Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The important part for most families is what it is not. The form is an information return, not a tax return, so filing it does not cost you any tax. A gift or inheritance from abroad is not income to you under US law.

So why does it hurt so many people? Because the penalty is tied to filing the form, not to owing money. You can owe zero tax, file the form a year late, and still face a penalty measured as a percentage of the gift itself. The gap between owing nothing and paying a percentage is the trap. The money arrives clean, often by wire from a foreign bank, with nothing telling you a form is due, and the failure surfaces only later. Below, we walk through who has to file, what the penalty is, and the path that actually gets it removed.

When You Have to File: The $100,000 Threshold

You file Form 3520 for a foreign gift or inheritance when the total from one foreign source crosses a dollar line in a single calendar year. The lines are different depending on who the money came from.

• From a foreign individual or a foreign estate. More than $100,000 in the year. The line covers the most common case, an inheritance or gift from a parent or relative who is not a US citizen or resident.
• From a foreign corporation or foreign partnership. A much lower threshold, around $20,573 for 2026, adjusted for inflation each year.

Two details catch people. First, you add up everything from one source across the whole year. Four wires of $30,000 from the same parent cross the $100,000 line together, even though no single transfer did. Second, gifts from people related to the giver can be counted together with theirs. If you have received money from family abroad and you are close to these numbers, it is worth a careful look before you assume you are clear. If you just received a foreign inheritance and want the calmer, step-by-step version, see reporting a foreign inheritance to the IRS.

Foreign Trusts and Form 3520-A

If your situation involves a foreign trust rather than a one-time gift, the reporting goes up a level. Setting up a foreign trust, putting assets into one, or receiving distributions from one all get reported on Form 3520. And if you are treated as the owner of the trust under US tax rules, the trust itself has to file a companion return, Form 3520-A.

Form 3520-A has its own trap. The return is due March 15, a full month before your personal return, and it needs its own extension. People who extend their 1040 and assume everything moves with it miss it constantly. One useful exception is for certain Canadian retirement accounts, which are excused from this trust reporting by an IRS rule, though they still show up on other foreign-account forms. Foreign trusts get complicated fast, so the larger and ongoing ones are where we usually bring in co-counsel. For the full picture of how the US taxes a foreign trust, the grantor and non-grantor rules, and the throwback tax on distributions to US beneficiaries, see our guide to foreign trusts and US tax. If your foreign accounts are the bigger issue, see our FBAR and FATCA reporting overview.

How Much Is the Penalty for Not Filing Form 3520?

The question I get most about this is, "How much is the penalty?" The answer depends on which part of the form was missed, and the three numbers below are what is actually at stake when it is late or missing.

• Foreign gift or inheritance (the gift portion). 5% of the gift for each month it is late, capped at 25% of the gift.
• Transfers to or distributions from a foreign trust (the trust portions). The greater of $10,000 or 35% of the amount involved.
• Form 3520-A not filed. The greater of $10,000 or 5% of the trust’s assets.

Put a number on it. On a $500,000 foreign inheritance reported late, the gift penalty can reach $125,000, for a form that owed no tax at all. These notices, often a CP15, are generated automatically and can land in the six figures. The notices look terrifying. The next two sections are the reason they are far more survivable than that first letter suggests, and if one is already in your mailbox, our CP15 penalty notice guide covers the response deadline and the fight itself.

The Open-Year Trap That Never Expires

A quieter danger than the penalty is the reason "I will just wait it out" does not work. Normally the IRS has a limited window to look back at a tax year, and after it closes you are safe. But when a required Form 3520 (or several other foreign-information forms) is not filed, that window for the entire tax year never even starts. The window stays open until you finally file the form, plus three years after that.

In plain terms, a foreign gift you received and never reported eight years ago can still be examined today, along with everything else on that year’s return. Time does not heal this. Only filing does. So the answer to an old, unreported gift is almost always to come forward and file correctly now, which both addresses the penalty and starts closing the year. A "quiet" fix, just mailing in old forms with no explanation, is the wrong move for the same reason. The IRS treats that as a red flag, and it forfeits the protection that a proper reasonable-cause filing gives you.

Reasonable Cause: How Penalties Get Erased

Most people who missed Form 3520 did so for an understandable reason. No one ever told them a tax-free inheritance had to be reported, the foreign lawyer settling the estate said nothing about US forms, the money simply arrived. Those facts are the heart of a reasonable-cause defense. Reasonable cause means you used ordinary business care and prudence and still missed the deadline. Reasonable cause is not a guarantee, and ignorance alone is not always enough, but a well-documented story of an honest, careful taxpayer is exactly what this relief is built for.

The timing of how the IRS handles this changed in your favor. The change followed years in which the IRS charged these penalties automatically and then took most of them back. From 2018 through 2021 the agency abated 67 percent of these penalties and 78 percent of the dollars, more than $179 million a year by the National Taxpayer Advocate's count. Read that the way it deserves to be read. Roughly two thirds of the penalties charged in this area should never have been charged, and the people who got them back are the ones who answered. As of late 2024, the IRS reviews reasonable cause before it charges a Form 3520 penalty, both for the foreign-gift portion and for the foreign-trust portions, rather than charging first and making you fight to undo it. A 2025 update pushed even more of these to a no-action close at the campus level when the submission is well documented. CP15 penalty notices for Form 3520 have been reduced to zero, at the IRS appeals level and through stand-alone reasonable-cause letters, where the documentation is strong. The lesson is consistent. The reasonable-cause statement you submit with the late form is the single thing that decides the outcome, so it is worth building carefully.

If a CP15 Notice Arrives, You Have 30 Days

A CP15 is the notice that says the penalty has been charged. The date printed on it starts a 30-day clock to protest to the IRS Independent Office of Appeals, and that deadline is the most consequential one in this whole area, because of what happens when it passes.

Letting the window close does not simply mean you missed a chance to argue early. A closed window can bar you from disputing the underlying liability at all in a later collection due process hearing, under IRC §6330(c)(2)(B), on the theory that you already had an opportunity to dispute it and did not take it. What is left after that is the refund route, and the refund route is expensive by design. You pay the penalty in full first, file a claim on Form 843, and then wait six months before you can sue under §7422 unless the claim is denied sooner.

So the practical order is simple. A CP15 on the desk is a 30-day matter, not a next-month matter. If you are reading this with one in hand, the date on the notice is the first thing to check.

What the 2026 Rulings Closed, and What Survived

You may have read that these foreign-information penalties were being successfully challenged. The challenges worked for a while, and 2026 is the year they stopped working for foreign gifts specifically.

The argument came from Farhy v. Commissioner, where the Tax Court held in 2023 that the IRS could not simply assess certain related penalties because Congress never made them assessable, and would have to sue to collect. Practitioners ran that theory at every international information return. The theory has not travelled. The D.C. Circuit reversed Farhy in 2024, the Second Circuit agreed in Safdieh this February, and in Mukhi the Tax Court let roughly $11 million of foreign-trust penalties on Forms 3520 and 3520-A stand, rejecting a constitutional challenge to them, while striking only the Form 5471 piece.

For foreign gifts, two decisions from the Northern District of California closed the remaining doors. Huang dismissed the assessment-authority claim in 2025. Then in Zhang, decided May 4, 2026, the court held that the IRS may assess the §6039F penalty on a late-filed Form 3520, and rejected an Eighth Amendment excessive-fines challenge along with it. On July 30, 2026 a third decision in the same district shut off the Administrative Procedure Act route on jurisdictional grounds, holding that a refund suit is the adequate alternative remedy.

The facts of Zhang are worth knowing because they are so ordinary. A Chinese citizen who became a US tax resident received about $287,000 in wedding gifts from her parents, grandparents and uncles. She filed her income tax return on time using consumer tax software, which never asked about foreign gifts. She caught the omission herself ten months later and filed the late form with a reasonable-cause statement. The IRS assessed $71,777, the statutory maximum, and Appeals reduced it to $57,422. She paid, sued for a refund, and lost the argument that the penalty could not be assessed at all. What the court did leave open was reasonable cause, and the government is now testing even that on summary judgment, arguing that the software gave her no advice and that she should have checked.

The practical consequence is the part worth acting on. Reasonable cause is close to the only defense left standing, which makes the statement you file the whole case rather than a formality. We do not build a plan on an unsettled constitutional argument that a court has now twice declined. We build the reasonable-cause record, we build it before the IRS makes contact where that is still possible, and we keep the remaining arguments in reserve for the matters where they genuinely fit. If a matter does become a real dispute, that is litigation, which is work this firm does rather than hands off.

How We Work, and When We Co-Counsel

Cross-border reporting covers a wide range, so we are honest about where our role sits. A straightforward foreign gift or inheritance, the screening, the reasonable-cause package, and the late Form 3520 filing, is handled here, on a fee quoted up front once we see the facts. For ongoing foreign trusts, layered offshore structures, and large multi-year cleanups that also involve unreported foreign income, we co-counsel with an international tax advisor so you get the right depth without paying for the wrong tool.

Almost all of this is done by phone and video, which fits clients who are out of state or out of the country. If a foreign inheritance is also bringing foreign accounts into your life for the first time, the reporting tends to come in layers, and our international and cross-border hub maps how the FBAR, FATCA, and trust forms fit together.

Frequently Asked Questions

Common Situations

The inheritance from abroad. A US citizen in Florida inherits about $400,000 from a parent in Israel. The money wires in over several months, no tax form attached, and three years pass before an accountant asks the right question. Because the gift was over $100,000, Form 3520 was due. The failure was innocent, so a late filing with a reasonable-cause statement is the path, and the open-year clock starts closing once it is filed.

The CP15 in the mailbox. A client opens an automated IRS notice charging a six-figure penalty for a Form 3520 filed late. The notice reads like a final bill, and it is not one. Under current IRS procedure, reasonable cause is reviewed before these stick, and well-documented notices like this have been reduced to zero. The work is in the documentation, not in panic.

The foreign trust nobody flagged. A family funded a trust overseas years ago and has been taking distributions, never filing Form 3520 or the March 15 companion return. This is the layered case where we screen the facts, then co-counsel an international tax advisor on the trust mechanics while handling the Florida and filing side here.

Sources of Law

• Foreign gifts and bequests: IRC §6039F (Form 3520 Part IV); reporting threshold of more than $100,000 from a foreign individual or estate; lower inflation-adjusted threshold (about $20,573 for 2026; verify at irs.gov yearly) for gifts from foreign corporations or partnerships; gift penalty 5% per month up to 25%. irs.gov
• Foreign trusts: IRC §§6048, 6677 (Forms 3520 and 3520-A); trust-portion penalty the greater of $10,000 or 35% of the amount; Form 3520-A penalty the greater of $10,000 or 5% of trust assets; Form 3520-A due March 15.
• Open statute of limitations: IRC §6501(c)(8) (income-tax year stays open until the information return is filed, plus three years).
• Reasonable cause reviewed before assessment: IRM 20.1.9.13.3 (gift/bequest, §6039F) and IRM 20.1.9.14.3 (trust portions, §6677) (October 2024); IRM 21.8.2.19.2 (October 2025, campus-level gating). irs.gov IRM 20.1.9
• Assessability litigation: Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024), reversing 160 T.C. No. 6 (2023), and Safdieh v. Commissioner, No. 25-501-cv (2d Cir. 2026) (related §6038(b) penalties assessable); Mukhi v. Commissioner, 162 T.C. No. 8 (Apr. 8, 2024) (the §6677 foreign-trust penalties are not fines under the Excessive Fines Clause and collection was sustained; the §6038(b) Form 5471 penalties held not assessable), supplemented on reconsideration, 163 T.C. No. 8 (Nov. 18, 2024) (adhering to the §6038(b) holding because the appeal lies in the Eighth Circuit; read in full from the official opinion text, retrieved 2026-09-03); Wilson v. United States, 6 F.4th 432 (2d Cir. 2021) (35% foreign-trust penalty). Canadian retirement-account exception: Rev. Proc. 2014-55.
• Foreign-gift penalties specifically: Huang v. United States, No. 24-cv-06298-RS (N.D. Cal. May 28, 2025) (assessment-authority claim dismissed); Zhang v. Internal Revenue Service, No. 24-cv-08210 (N.D. Cal. May 4, 2026) (§6039F penalty assessable; Eighth Amendment excessive-fines claim rejected; reasonable cause and the §6751(b) supervisory-approval claim allowed to proceed); Zhang v. Internal Revenue Service, No. 26-cv-00525-VKD (N.D. Cal. July 30, 2026) (APA route foreclosed, refund suit the adequate alternative remedy). Two different N.D. Cal. taxpayers share the surname Zhang and several secondary write-ups conflate their penalty figures. (retrieved 2026-08-19)
• Penalty-notice procedure: 30-day protest to the Independent Office of Appeals from the CP15 notice date; IRC §6330(c)(2)(B) (prior opportunity can bar a later liability challenge); refund route via Form 843 and IRC §7422.

What an $11 Million Foreign-Trust Case Shows About Form 3520

The families who end up in litigation are usually the ones who were told this was simple. With Form 3520 the simple version is that a gift or a trust distribution is not income, so nothing needs to be done, and that version is what a client repeats to me years later with a notice in hand. I read the opinion below in full because it shows what the statute does once the simple version is all a family ever heard.

In one case I have reviewed, a Missouri man built three foreign entities between 2001 and 2005, a foreign corporation and two arrangements the tax law treats as foreign trusts (one of them was called a foundation, which tells you nothing about how the IRS sees it). Through them he opened foreign brokerage accounts. By the government's count, which I take from the opinion, at least $9,729,249 went into one of the trusts between 2005 and 2007, from him and from his other entities, and he took at least $4,763,464 back out between 2006 and 2008. He disputed those figures, but the penalty arithmetic ran on them. In 2014 he was indicted, and he pleaded guilty to one count of signing a false return and one count of failing to file an FBAR, which closed the criminal side. Then the civil side opened. In 2015 and 2016 he filed, under protest, the foreign information returns he had never filed, including Forms 3520 and 3520-A for 2005 through 2013. In September 2017 the IRS assessed $5,072,449 for the late Forms 3520, $5,920,419 for the late Forms 3520-A, and $120,000 for the late Forms 5471, roughly $11 million on forms that carry no tax. He offered $1,000,000 to settle everything, then about $2,672,717 in liquidated assets, and the IRS rejected both against its own estimate that it could collect $4,266,334 from him. In April 2024 the Tax Court struck the $120,000 Form 5471 piece, because the IRS had no authority to assess it, and rejected his constitutional challenge to the $11 million of foreign-trust penalties, holding that they are not fines and so the ban on excessive fines does not reach them. In November 2024 the court kept its position on the $120,000 even after a federal appeals court in Washington had ruled the other way in a different taxpayer's case, because his own appeal would go to a different circuit.

In reading that opinion, I have a few take-home points.

The first is the arithmetic, and it is the first thing I explain to a client with a foreign trust, because it explains the size of the number. The trust penalty is 35 percent of what goes into a foreign trust and 35 percent of what comes out, measured on the gross amounts and never on any tax. Add his $9,729,249 in to his $4,763,464 out, take 35 percent, and the figure is $5.07 million, which is the Form 3520 penalty the IRS assessed, to within rounding. The Form 3520-A penalty runs separately, at 5 percent of the trust's assets for each year the return is missing, and that is where the other $5.9 million came from. Practice pointer. Before anyone files a late Form 3520 for a trust, I run that arithmetic on every transfer in each direction for every open year, because the number the IRS will assess is a multiplication and a family should hear it from me before the form goes in rather than read it on a notice.

Second, the penalty does not care whose money it was or whether any tax was owed on it. The money in that case was his own, moving into and out of accounts he controlled, and the penalty was more than twice what he ever took out. In my reading, the Tax Court treated these penalties as the price of making foreign structures visible rather than as punishment, and it pointed out that courts have said the same about FBAR penalties. Practice pointer. An argument that the penalty is out of proportion to the harm has not worked in this area, so I do not build a plan on it. Reasonable cause is the defense, and the first question I ask a new client is whether the failure has a story of ordinary care behind it, because in his case, after a guilty plea, that story no longer existed.

Third, the order of events set the price, and it is the part I watch most closely in a new file. He filed the forms in 2015 and 2016, after a criminal case, under protest, and by then every door that lowers the number had closed. The IRS's reasonable-cause review, the campus-level no-action close, and the voluntary disclosure program are each built for a person who comes forward before the agency has a file. A disclosure made while those accounts were still unknown to the government would have been priced by the Voluntary Disclosure Practice, with a negotiated penalty and a closing agreement, and that is the work I handle here from preclearance through the closing agreement. I quote the screen that decides which route is open as a flat fee at the consult, and the consult itself is free, against the $11 million the statute produced once the government moved first. Avoid the plan that waits for the IRS to ask, because every route on this page that reduces a Form 3520 penalty is open before contact and closed after it.

What I cannot take from the opinion is whether he owed the underlying tax, which sat in a separate deficiency case, or whether the Eighth Circuit would agree that these penalties are not fines, since that court had not ruled on the question when the Tax Court wrote. I would not read anything in it as changing the position of a family that received a gift from a parent abroad and never heard of the form. That family has the reasonable-cause path this page describes, and his case is the picture of what the statute does when that path is gone.

Kevin D. Klagge, Esq., admitted in Florida since 2012 and to the United States Tax Court. The case described above is a decision of the United States Tax Court rather than a matter handled by this firm. Past results do not guarantee a similar outcome.

Updated on September 3, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This article is general information about US tax and Florida law, not legal or tax advice, and does not create an attorney-client relationship. Foreign-information penalties and reasonable-cause relief turn on your specific facts and on IRS procedures that change; for foreign trusts and large multi-year cleanups we co-counsel an international tax advisor. Past results do not guarantee a similar outcome.