The IRS recently announced a significant policy change affecting taxpayers with foreign trusts, gifts and bequests. The IRS will no longer impose automatic penalties for late filing of Form 3520 and Form 3520-A. To qualify for this, a reasonable cause statement must be attached to these filings. Historically, late filers faced steep penalties, often without consideration of reasonable cause.
Form 3520, “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts,” and Form 3520-A, “Annual Information Return of Foreign Trust with a U.S. Owner,” are informational filing forms that are typically required to be submitted alongside an individual’s tax return in the event they are party to a foreign trust, or if they receive a foreign gift or bequest, in a particular tax year.
For Form 3520 (parts I-III) and Form 3520-A, IRS standard practice required that filings to report a U.S. taxpayer’s interest in a foreign trust past the specified deadline would result in the IRS automatically assessing late filing penalties under IRC § 6677. This is without considering any reasonable cause statements attached or otherwise submitted alongside the late-filed Form 3520 and/or Form 3520-A. A notice would be issued to inform the taxpayer of the penalty and potential interest, then direct the taxpayer to either pay or submit a reasonable cause statement to dispute the assessment. The penalties assessed on this late filing are defined as the greater of $10,000 or 35% of the gross value of property transferred to or received from a foreign trust.
Similarly, for Form 3520 (part IV), the IRS standard practice was to automatically assess penalties on late-filed forms to report foreign gifts or bequests. As defined under IRC § 6039F, such penalties are 5% of the total gift or bequest for each month the form is late, up to 25% of the total value.
The IRS has decided to begin reviewing and considering reasonable cause filing statements attached to an originally filed Form 3520 (parts I-III), and Form 3520-A returns upon receipt before assessing penalties as outlined under IRC § 6677. Penalties for late filings will not be assessed if the taxpayer demonstrates reasonable cause; however, late filing penalties on these forms may still apply if the IRS determines that willful neglect in filing is present.
Additionally, the IRS has also announced that it will no longer automatically assess late filing penalties per IRC § 6039F on late filings of Form 3520 Part IV at the time of filing.
This change reflects the IRS’s ongoing efforts to balance enforcement with fairness, especially for individuals navigating complex reporting requirements. Taxpayers are still urged to comply on time, as penalties may apply in cases of willful noncompliance.
Author: Evan Finer, CPA, CFP | [email protected]
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If you have questions about how this policy change affects your foreign trust or gift reporting obligations, reach out to Withum’s Founders and Tech Executive Services Team today.
