2025 Update for Expats with IRS Form 3520 Penalty Concerns

2025 Update for Expats with IRS Form 3520 Penalty Concerns

An Update for Expats with Form 3520 Penalty Concerns

At the close of 2024, the then-acting IRS Commissioner of the Internal Revenue Service made a statement that the IRS intends to change the method for assessing 6039F (Form 3520) penalties for failing to report foreign gifts. Unlike various other types of international information reporting forms, with Form 3520, the IRS got into the (bad) habit of automatically assessing penalties for failing to file a timely Form 3520.

For many U.S. Taxpayers, this was extremely unfair because there was no unreported income with the late Form 3520 filing. Rather, the taxpayer simply failed to report a gift they received from a foreign person, such as a non-resident alien parent or other family member. In a now all too common situation, the taxpayer does not learn about the Form 3520 filing requirements until several months or years after their timely filing was due.

Now that more than five months have passed since the original filing due date, the taxpayer is automatically assessed a Form 3520 penalty — 25 percent value of the gift, even if there was no unreported income.

Have Form 3520 enforcement protocols formally changed?

No Formal Changes to Form 3520 Enforcement Yet

Currently, the IRS has not published any statement indicating that they have formally changed the enforcement protocol for late filing Form 3520. Therefore, the IRS still reserves the right to automatically assess penalties against taxpayers who do not file Form 3520 timely.

The IRS has softened its Stance on Form 3520 Enforcement 

Despite the fact that the IRS has not issued any formal change to the Form 3520 enforcement procedure, many agents have become less aggressive when it comes to negotiating penalties that have already been assessed. For example, if a taxpayer was automatically assessed a penalty for filing a late Form 3520. In our experience, many of the agents have become more amenable to reducing or eliminating the penalty if the taxpayer can show reasonable cause.

Taxpayer Must Show Reasonable Cause

Even when the prior commissioner had stated that the IRS intends to modify the Form 3520 enforcement procedure, for a taxpayer to be eligible for a penalty abatement or waiver must still be able to convince the IRS that they established reasonable cause with their late filing. Taxpayers who are considering filing a late Form 3520 should consult with experienced counsel.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.