The short version

Here is a hard fact that catches careful, honest people every year. You can owe the IRS nothing in tax and still face a five-figure or six-figure penalty, because of a form you never knew existed. The form is Form 3520, and it is the landmine in an American expat’s compliance life. It is not a tax return. It is an information return, a disclosure, and for years the IRS assessed penalties on late ones automatically, by computer, before a human ever read your explanation.

Three life events trigger it. You inherit money from a parent who lived abroad. You receive a large gift from a foreign family member. Or you hold, fund, or take a distribution from a foreign trust, which in many countries includes ordinary retirement and savings vehicles that Americans would never think of as trusts. In each case the tax due is often zero. The reporting duty is not, and the penalty for missing it has historically been brutal.

There is good news, and it is recent. In October 2024 the IRS announced it would stop automatically assessing penalties on certain late Form 3520 filings and would read your reasonable-cause explanation before assessing anything. This article walks the three triggers, the exact penalty structure under the law, that 2024 change, and the practical path back to clean if you are already late.

What the law actually says (primary authority first)

Two Code sections do the work here, and they are separate, with separate penalties. Keeping them straight is the whole game.

Foreign gifts and bequests, Internal Revenue Code section 6039F. When a US person receives gifts or bequests from foreign sources above a threshold, section 6039F requires a report, which is filed as Part IV of Form 3520. The thresholds are not the same for every foreign giver. Per the IRS, you must report gifts or bequests from a nonresident alien individual or a foreign estate only if the total you receive from that source during the year is “more than $100,000,” and once you cross it you “must separately identify each gift in excess of $5,000.” A much lower threshold applies to purported gifts from a foreign corporation or a foreign partnership: the IRS sets that inflation-adjusted figure at “$20,116 for 2025, and $20,573 for 2026 (adjusted annually for inflation).” The penalty for failing to report lives in section 6039F(c), which provides a penalty “equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).” Read that again. The penalty is measured against the size of the gift, not against any tax, because there usually is no tax. A clean inheritance of 1,000,000 dollars from a foreign parent, reported eight months late, exposes you on its face to a 200,000-dollar penalty for a piece of paper. The statute also provides that no penalty applies if the failure is shown to be “due to reasonable cause and not due to willful neglect.”

Foreign trusts, Internal Revenue Code sections 6048 and 6677. A different and older regime governs foreign trusts. Section 6048 requires reporting of three things: the creation of or transfer of property to a foreign trust, the annual activity of a foreign trust treated as owned by a US person, and the receipt of distributions from a foreign trust. Those duties are met with Form 3520 (by the US person) and Form 3520-A (the trust’s own annual return). The penalty is in section 6677, and it is heavier than the gift penalty. Under section 6677(a), the penalty for a failure to file under section 6048 is “the greater of $10,000 or 35 percent of the gross reportable amount.” For the foreign-trust-with-a-US-owner annual return under section 6048(b), which is Form 3520-A, section 6677(b) applies the same rule “by substituting 5 percent for 35 percent,” so the floor is again 10,000 dollars but the percentage is 5 percent. As with the gift penalty, the statute provides a reasonable-cause defense, and it specifically provides that a foreign jurisdiction’s own penalty for disclosing the required information does not count as reasonable cause.

So the structure, stated plainly, is this. Miss a foreign-gift report and the exposure is up to 25 percent of the gift. Miss a foreign-trust transfer or distribution report and the exposure is the greater of 10,000 dollars or 35 percent. Miss the trust’s annual return and it is the greater of 10,000 dollars or 5 percent. None of these is a tax. All of them can be larger than any tax you would ever have owed.

The 2024 change you need to know about

For years the cruelty of this system was not just the size of the penalties, it was the automation. The IRS assessed the section 6039F penalty on a late-filed Part IV by computer, at the moment of filing, before anyone read the reasonable-cause statement the taxpayer had carefully attached. People did the right thing late, explained why, and got hit anyway, then had to fight to abate a penalty that should never have been assessed.

That changed in October 2024. As reported by the Journal of Accountancy, IRS Commissioner Danny Werfel announced at the UCLA Extension Tax Controversy Conference that “the IRS will no longer automatically assess penalties at the time of filing for a late-filed Form 3520” Part IV, and that “by the end of 2024, the IRS will begin reviewing any reasonable-cause statements taxpayers attach to late-filed Forms 3520 and Forms 3520-A,” including the trust portion, “before assessing any Sec. 6677 penalty.” The National Taxpayer Advocate, whose office had pushed for this for years, confirmed the same change on its blog: “The IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520, Part IV.”

Why it mattered is in the numbers the IRS itself produced. The National Taxpayer Advocate reported that for 2018 through 2021, the IRS abated section 6039F penalties on Form 3520 Part IV at a rate of “67 percent of the penalties assessed and 78 percent of the dollars,” and the Journal of Accountancy put the abated total at “over $179 million.” When two out of three assessed penalties get reversed, the assessment process is the problem. The same office noted the human cost: among foreign-gift penalties in that period, “taxpayers who reported $400,000 or less in income received an average penalty of over $235,000.” A quarter-million-dollar penalty, on average, on people of modest means, for late paperwork on money that was usually not even taxable.

Two cautions keep this honest. First, the 2024 change is a change in process, not a repeal of the penalties. The statutes are unchanged, the penalties still exist, and a reasonable-cause statement that the IRS does not accept can still produce an assessment. Second, the relief is targeted. The automatic-assessment halt is specific to the Part IV foreign-gift penalty, and the broader promise is that the IRS will read reasonable-cause statements on Forms 3520 and 3520-A before assessing. It is not an amnesty and it is not automatic forgiveness. It means the door is open to be heard before you are penalized, which is exactly the opening that careful work is built to use.

How it works in practice

Most Form 3520 problems I see come from people who were trying to be responsible, not people who were hiding anything.

Consider an inheritance. A US citizen living in Brazil loses her father, a Brazilian who never set foot in the United States. She inherits the equivalent of about 1,200,000 US dollars. There is no US estate tax on her, because the estate of a nonresident who is not a US citizen is not taxed on Brazilian assets, and an inheritance is not income to her. Her US tax on this event is zero. But because the bequest from a nonresident alien exceeds 100,000 dollars, she was required to file Form 3520 Part IV for the year she received it, and she did not know that. On its face, section 6039F exposes her to up to 25 percent, here as much as 300,000 dollars, on a transfer that carried no tax at all. That gap, zero tax and a potential six-figure penalty, is the trap in one sentence.

Now a foreign trust. An American who moved to Mexico contributes for years to a local long-term savings and investment arrangement that, under US rules, is treated as a foreign trust even though no one involved would ever call it that. He funded it (a section 6048 transfer), it exists with him as a US owner (a Form 3520-A duty), and eventually he takes money out (a section 6048 distribution). Each of those is a separate reporting event, and the section 6677 penalty floor is 10,000 dollars per failure, climbing to 35 percent of the amounts involved. He owes little or no US tax on the arrangement in most years. The reporting exposure dwarfs the tax.

So what is the path back? For a late or missing Form 3520 or 3520-A where the conduct was not willful, the work centers on a strong, documented reasonable-cause statement filed with the late form, because, after the 2024 change, that statement is now read before a penalty is assessed. Reasonable cause is a facts-and-circumstances showing that you exercised ordinary business care and prudence and still failed to file on time, supported by specifics: what you knew, when you learned of the obligation, why the failure happened, and what you did to fix it once you knew. Where the Form 3520 gap sits alongside unfiled returns and foreign-account reports, it often belongs inside a larger comeback. Two structured routes matter here. The IRS Delinquent International Information Return Submission Procedures allow a taxpayer who has reasonable cause and is not under examination to file late information returns, including Form 3520 and Form 3520-A, with a reasonable-cause statement attached. And for someone living abroad who is also behind on tax returns and foreign-account reports, the Streamlined Foreign Offshore Procedures bring the whole picture current, three years of returns and six years of FBARs with a non-willful certification, and the IRS states that an eligible taxpayer who complies “will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.” Information return penalties is the phrase that reaches Form 3520. Which door fits is a fact question, and it is the first thing to get right.

The numbers

Trigger	Reporting threshold	Form / part	Penalty for failure to report
Gift or bequest from a nonresident alien individual or foreign estate	More than 100,000 USD in the year (identify each gift over 5,000 USD)	Form 3520, Part IV	5% of the gift per month, up to 25% (IRC 6039F(c))
Purported gift from a foreign corporation or foreign partnership	More than 20,573 USD for 2026 (20,116 USD for 2025), inflation-adjusted	Form 3520, Part IV	5% of the gift per month, up to 25% (IRC 6039F(c))
Transfer to, or distribution from, a foreign trust	Generally any reportable transfer or distribution	Form 3520 (Parts I and III)	Greater of 10,000 USD or 35% of the gross reportable amount (IRC 6677(a))
Annual return of a foreign trust with a US owner	Required annually for a US-owned foreign trust	Form 3520-A (via IRC 6048(b))	Greater of 10,000 USD or 5% of the gross reportable amount (IRC 6677(b))
Abatement rate, auto-assessed Part IV penalties, 2018 to 2021	n/a	Form 3520, Part IV	67% of penalties and 78% of dollars abated; over 179M USD abated (NTA; Journal of Accountancy)
Average Part IV penalty on filers reporting 400,000 USD or less in income, 2018 to 2021	n/a	Form 3520, Part IV	Over 235,000 USD average (National Taxpayer Advocate)

What this means for you

A few practical points if a foreign gift, inheritance, or trust is in your picture.

First, separate the tax question from the reporting question, because they are not the same. In most of these situations there is no US tax on the gift, the inheritance, or the trust. The duty that bites is the disclosure, and the penalty attaches to the size of the asset, not to any tax. Do not let “I did not owe anything” become “so I did not have to file,” because on Form 3520 those are two different worlds.

Second, know which of the three triggers you are in, because the threshold and the penalty differ. A gift or bequest from a foreign individual or estate is reportable over 100,000 dollars and carries the 5-percent-per-month, 25-percent-cap penalty. A purported gift from a foreign company or partnership is reportable at a far lower inflation-adjusted figure. A foreign trust, including arrangements you might not recognize as trusts, brings the heavier section 6677 penalty with its 10,000-dollar floor and 35 percent rate. Identifying the right bucket is step one.

Third, the 2024 change helps you, but only if you use it correctly. The IRS now reads a reasonable-cause statement before assessing on a late Part IV, and has said it will do the same on the trust portions of Forms 3520 and 3520-A. That makes the quality of the late filing and its reasonable-cause statement decisive. It is not a reason to keep waiting, and it is not a guarantee the statement will be accepted. It is a reason to come forward with a complete, well-supported package rather than a bare late form.

Fourth, if the Form 3520 gap is part of a larger pattern of unfiled returns and accounts, treat it as part of one comeback, not a standalone fix. The delinquent international information return procedures and the streamlined foreign path are designed to bring these filings current together, and choosing the right one is fact specific.

Every case turns on its own facts, and I do not promise specific outcomes. What I can do is read where you stand, identify which trigger and which penalty regime apply, and lay out the path to get current with the strongest reasonable-cause posture the facts support.

How Sheepdog Tax Resolution can help

I am a CPA and Certified Fraud Examiner, and this is a veteran-owned practice. If you have received a large gift or inheritance from abroad, or you have any dealings with a foreign trust, and you have just realized Form 3520 may have been required, the first step is a straightforward review: which of the three triggers applies, whether you crossed the threshold, whether a late filing is the right move, and whether the reasonable-cause and procedural posture, the delinquent information return procedures, a streamlined filing, or a standalone late form with a reasonable-cause statement, fits your situation.

Every case turns on its own facts, and I do not promise specific outcomes. What I offer is an honest reading of where you stand and a clear plan to get current with the strongest defensible position the facts allow. To start the review, reach me at noah@sheepdogtax.com.

Sources (primary authority first, then secondary commentary)

26 U.S.C. 6039F, Notice of large gifts received from foreign persons. https://www.law.cornell.edu/uscode/text/26/6039F
26 U.S.C. 6048, Information with respect to certain foreign trusts. https://www.law.cornell.edu/uscode/text/26/6048
26 U.S.C. 6677, Failure to file information with respect to certain foreign trusts. https://www.law.cornell.edu/uscode/text/26/6677
IRS, Instructions for Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts). https://www.irs.gov/instructions/i3520
IRS, Gifts from a foreign person (reporting thresholds and section 6039F penalty). https://www.irs.gov/businesses/gifts-from-foreign-person
IRS, About Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner). https://www.irs.gov/forms-pubs/about-form-3520-a
IRS, Delinquent International Information Return Submission Procedures. https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures
IRS, U.S. Taxpayers Residing Outside the United States (Streamlined Foreign Offshore Procedures). https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states
National Taxpayer Advocate, NTA Blog: IRS Hears Concerns From TAS and Practitioners, Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties (Oct. 2024). https://www.taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10/
Journal of Accountancy, IRS to end automatic penalties for late filing of foreign gift, bequest forms (Oct. 2024). https://www.journalofaccountancy.com/news/2024/oct/irs-to-end-automatic-penalties-for-late-filing-of-foreign-gift-bequest-forms/

Prepared by Noah Green, CPA, CFE.

The Form 3520 Penalty Trap: Gifts, Foreign Trusts, and Inheritances