Most of what you've read online about IRS problems is wrong, or at least misleading. I'm Darrin Mish. I practice tax law in Tampa and I've been doing this for 32 years. Here's what's actually true.
The Penalty Notice That Arrives First
You file Form 3520 late. Maybe months late, maybe years late. The IRS processes the form and a few months after that, a penalty notice arrives. The amount is large, often six figures, even though you owe no underlying tax.
Late Form 3520 filings trigger automatic penalty assessment under IRC §6677. The notice is the start of a process, not the end. Most of these penalties can be abated. The system is designed to issue first and adjust later. After 32 years of working international information return penalties, I have seen more Form 3520 penalty notices than almost any other form.
How the Penalty Gets Assessed
The IRS processes Form 3520 and runs an automatic penalty calculation based on the transactions reported.
For Part IV foreign gifts and inheritances: 5 percent of the unreported amount per month from the original due date, up to 25 percent maximum.
For Parts I, II, and III foreign trust transactions: 35 percent of the gross reportable amount.
The notice (typically a CP15) arrives within a few months of the late filing. It states the penalty amount, the underlying transaction, and the appeal options.
The Two Paths to Penalty Removal
Path one: reasonable cause abatement under IRC §6677(d). You file a written response (or request reconsideration if the penalty is already assessed) explaining the facts that establish reasonable cause for the late filing.
Path two: appeal to the IRS Office of Appeals. If reasonable cause is denied at the assessment level, you can request Appeals review using Form 12203 or by filing a Collection Due Process request if collection has been initiated.
For Form 3520 cases specifically, reasonable cause has historically been the more productive path. Appeals officers handling international information return penalties are generally aware that the form is obscure and that genuine first-time filers often meet the standard.
What Reasonable Cause Looks Like
Reasonable cause for Form 3520 turns on whether the taxpayer acted with ordinary care and prudence and was unable to comply with the filing requirement.
The strongest fact patterns include taxpayers who had never had international tax exposure before the triggering transaction, taxpayers whose tax preparer never asked about foreign gifts or trusts, taxpayers whose underlying transaction was structured by foreign counsel who did not coordinate with U.S. advisors, and taxpayers who came forward voluntarily before any IRS contact.
Weaker fact patterns include taxpayers with sophisticated international tax history who should have known the form existed, taxpayers with multiple years of identical transactions, and taxpayers who came forward only after IRS notice.
The Documentation That Wins Abatements
A reasonable cause submission for Form 3520 should include several specific pieces of documentation.
A written narrative explaining the taxpayer’s tax history, the circumstances of the underlying transaction, when and how the taxpayer learned of the filing obligation, and the immediate steps taken upon learning.
Evidence of reasonable reliance on tax advisors: engagement letters, correspondence with preparers showing the foreign transaction was disclosed, evidence that the preparer did not raise Form 3520.
The late-filed Form 3520 itself, with proper completion and the underlying transaction documented.
Evidence of voluntary compliance: the fact that the taxpayer came forward without IRS prompting strengthens the reasonable cause argument materially.
What Does Not Work
Several arguments rarely succeed.
“I didn’t know” alone is not enough. Reasonable cause requires that the failure to know was itself reasonable, which means showing what efforts were made and why those efforts did not produce the knowledge.
“My tax preparer didn’t tell me” works only when the reliance was reasonable. If the preparer was a general practitioner with no international tax background and the taxpayer disclosed the foreign transaction, the reliance argument is stronger. If the taxpayer never told the preparer about the foreign transaction, the reliance argument fails because the preparer cannot advise on undisclosed facts.
Foreign country differences (“they don’t have this form in my home country”) are generally not accepted because the obligation is created by U.S. law regardless of foreign reporting structures.
The Delinquent International Information Return Submission Procedures
For Form 3520 specifically, the Delinquent International Information Return Submission Procedures provide a structured late filing path for taxpayers who have no unreported income from the underlying transaction.
The submission consists of the late form, an explanation of the reasonable cause, and a certification that no income tax was owed on the underlying transaction. If accepted, the IRS waives the §6677 penalty.
Acceptance is not automatic. The IRS reviews the submission and determines whether the facts support waiver. Submissions that include detailed reasonable cause narratives, prompt voluntary action, and clean income tax compliance generally have high acceptance rates.
The Streamlined Path for Bigger Problems
When the late Form 3520 is part of a larger non-compliance picture (unreported foreign income, late FBARs, multiple years of issues) the Streamlined Filing Compliance Procedures are the more comprehensive path.
Streamlined incorporates Form 3520 filings into the broader streamlined submission. The 5 percent SDOP penalty applies to the highest aggregate year-end balance, which can include trust-related assets but does not include the gross gift or inheritance value for Form 3520 purposes.
Time Is the Other Variable
The Form 3520 penalty is capped at 25 percent of the reportable amount for foreign gifts (Part IV) and 35 percent for trust transactions. Once the cap is reached, additional delay does not increase the penalty.
For Part IV gift penalties, the cap is reached after five months of non-filing. Most penalty notices arrive after the cap has been hit, so the assessed penalty is already at the statutory maximum.
That structure changes the strategic calculation. Once you are at the cap, the urgency shifts from preventing further penalty growth to building the strongest possible abatement submission.
What Not to Do After the Penalty Notice
Do not pay the penalty before challenging it. Payment can complicate the refund posture and is rarely necessary at the front end.
Do not ignore the notice. Penalty assessment becomes final after the appeal window closes, and collection follows. The IRS is increasingly aggressive about collecting international information return penalties.
Do not file additional late returns without coordinating the submissions. Each filing is its own reasonable cause case and the documentation should be consistent across all of them.
Get Help Now
If you have received a Form 3520 penalty notice or you are about to file a late Form 3520, the abatement work is detailed but the success rate is good for taxpayers with reasonable cause facts. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We file late Form 3520s and we get the penalties removed.