Form 3520 penalty

What triggers this penalty

• Missing required reporting of a transfer to or distribution from a foreign trust.
• Failing to satisfy applicable reporting connected to ownership of a foreign trust.
• Omitting reportable foreign gifts or inheritances when the applicable rules require disclosure.

Potential amount

• For covered foreign trust failures, the initial penalty is generally the greater of $10,000 or a percentage of the reportable amount; the percentage depends on the reporting obligation.
• Foreign gift reporting failures generally carry 5% of the unreported gift for each month of failure, up to 25%, rather than the foreign trust minimum formula.
• Continued foreign trust reporting failures after IRS notice can create additional penalties; identify the relevant provision and statutory limits before calculating exposure.

Common situations

• A U.S. person receives a reportable gift from family abroad.
• A foreign trust distributes cash or property to a U.S. beneficiary.
• A taxpayer treats a trust payment as a simple family gift without reviewing the documents.

Identify the source of the transfer

A gift from an individual and a distribution from a trust are not interchangeable. Determine who legally made the payment and obtain the underlying documents. Reportability does not necessarily mean the receipt itself is taxable, but failure to disclose can still have substantial consequences.

Separate Form 3520 from Form 3520-A

A U.S. owner of a foreign trust may have obligations involving both forms. Filing one does not automatically satisfy the other, and the applicable deadlines and penalty provisions need separate review. Do not assume that the deadline for an income tax return governs every foreign trust filing.

Use evidence, not labels

Collect trust instruments, gift letters, bank records, valuations and communications with advisers. A reasonable cause submission should explain the actual failure and corrective steps. Family intent alone does not establish the U.S. tax character of a transfer or excuse a missed information return.

What to do after receiving a notice

• Read every page of the notice, identify the form, tax period and legal basis, and record the response deadline immediately. Do not ignore the notice while you investigate whether the assessment is correct.
• Gather the filed return, attachments, extension requests, delivery confirmations and correspondence. Compare the IRS calculation with your records before accepting the amount or disputing it; a filing error and an IRS processing error require different explanations.
• Respond through the address or method stated in the notice, keep a complete copy and proof of timely delivery, and review any appeal rights. Do not assume that a telephone call or a pending relief request suspends another deadline.

Is penalty relief available?

• Relief may be available depending on the facts. Identify the specific penalty and the applicable relief standard before choosing a procedure; eligibility for one type of relief does not establish eligibility for another.
• If reasonable cause is relevant, prepare a truthful, dated account of what prevented compliance, what steps you took to comply, and how quickly you corrected the problem. Support the explanation with records rather than a generic claim that you did not know the rule.
• Chirino USA can review the filing history, notice and supporting evidence to help evaluate correction and response options. Filing the missing information does not itself cancel an assessed penalty or guarantee that the IRS will accept a relief request.