Form 3520 Penalty Relief: Late Reporting of Gifts and Inheritances from UK Family

Form 3520 is an information return. It reports, among other things, gifts and inheritances a US person receives from non-US individuals — a deposit from a parent in Surrey, a share of a grandparent's estate — once they exceed $100,000 in a year. There is no tax on the gift. The penalty for reporting it late, however, is one of the harshest in the code.

Short answer

The penalty for a late or missing Form 3520 gift report is 5% of the value of the gift for each month the form is late, up to 25%. It is assessed automatically once the IRS notices, and it can be removed if you show reasonable cause. Since late 2024 the IRS has said it will read a reasonable-cause statement attached to a late Form 3520 before assessing the penalty, rather than assessing first and asking questions later — which makes the statement you attach the single most important document in the process.

When Form 3520 is required for gifts

• Gifts or bequests from a non-resident alien individual or foreign estate totalling more than $100,000 in the tax year (aggregate all gifts from related people).
• Gifts from foreign corporations or partnerships above a much lower, inflation-indexed threshold (around $20,000; $20,116 for 2025).
• Separately, Part III covers distributions from foreign trusts, and Parts I–II cover transfers to and ownership of foreign trusts — which is where many UK pension and trust questions land.

The form is due with your income tax return, including extensions, and is filed on paper to the IRS Ogden service centre.

How the penalty is calculated

For gifts (Part IV), the penalty is 5% of the unreported amount per month, capped at 25%. On a $250,000 inheritance reported eight months late, that is $62,500 — for a form that carries no tax. For foreign trust distributions (Part III) the penalty is 35% of the distribution, and for failing to report ownership of a foreign trust it is the greater of $10,000 or 5% of the trust's assets.

Interest runs on the penalty from the date of assessment, and the penalty can be collected like any other tax debt.

What changed in the IRS's approach

For years the IRS's practice was to assess the Part IV penalty systematically on every late Form 3520 and leave the taxpayer to appeal. In October 2024 the IRS Commissioner announced an end to automatic assessment for late-filed gift and inheritance reports: reasonable-cause statements would be reviewed before any penalty is charged. Two practical consequences:

1. A well-prepared statement attached to the late form now has a realistic chance of preventing the penalty rather than merely reversing it months later.
2. Filing late with a weak or missing statement remains the fastest way to a five-figure bill.

What "reasonable cause" means here

The standard is whether you exercised ordinary business care and prudence and nevertheless could not comply. Facts that carry weight:

• You relied on a professional who did not tell you about the form (name them, and say what you told them).
• You had no way of knowing the requirement existed — for example, an accidental American who only learned of US obligations recently.
• Serious illness, bereavement or similar circumstances around the due date.
• You filed as soon as you became aware, before any IRS contact, and your overall compliance history is clean.

Facts that do not help: not knowing the law in general, being busy, or the form being difficult. The statement should be factual, chronological, signed under penalty of perjury, and consistent with any Streamlined certification you have made.

The route back

1. Prepare the missing Form 3520(s) for each year a reportable gift was received, with a full reasonable-cause statement attached to each.
2. Check what else is missing. A large UK gift usually arrives in a UK account, so FBAR and Form 8938 reporting for the same years is often incomplete too. If income tax returns are also missing, the Streamlined Foreign Offshore Procedures may be the right vehicle and the Form 3520 is submitted within that package.
3. File on paper, tracked, and keep the proof of posting.
4. If a penalty notice arrives anyway, the response is a written request for abatement citing reasonable cause, with the same facts; if refused, the matter can go to IRS Appeals. First-time penalty abatement does not apply to Form 3520 penalties.

Responding to the IRS remains your responsibility. What we prepare is the form, the reasonable-cause statement and any abatement request — the documents that determine the outcome.

Key points

• Form 3520 gift reporting is required above $100,000 a year from foreign individuals; no tax is due, but the penalty is 5% per month up to 25%.
• Since late 2024 the IRS reviews reasonable-cause statements before assessing Part IV penalties.
• The statement must be specific, chronological and true; reliance on an adviser is the most common successful ground.
• Look at FBAR, Form 8938 and missing returns at the same time — they usually travel together.

Sources

• IRS — About Form 3520
• IRS — Gifts from foreign persons
• IRS — Penalty relief for reasonable cause