Can the IRS Assess a Form 3520 Penalty in 2026?
For families with roots in more than one country, an inheritance from a grandparent or a wedding gift wired in from overseas is a life event, not a tax event. The IRS sees it differently. A May 4, 2026 decision from the U.S. District Court for the Northern District of California has just made the form 3520 penalty harder to fight after the fact, and easier for the IRS to impose in the first place.
This piece is written for the people we see it hit most often: first- and second-generation Americans, dual-status households, and business owners whose parents or in-laws still live abroad. It walks through what the Zhang v. IRS decision actually held, what stayed the same, and what an owner or beneficiary should do now — the day you find out a foreign gift should have been reported and was not.
What is a Form 3520 penalty, and when does it apply? 📋
A form 3520 penalty is the civil charge under IRC § 6039F for failing to report a large foreign gift or bequest received by a U.S. person during the tax year. The statute sets it at 5 percent of the unreported amount per month, capped at 25 percent, unless reasonable cause is shown.
The reporting duty sits in Internal Revenue Code § 6039F. A U.S. person who receives more than $100,000 in gifts or bequests from a nonresident alien individual or a foreign estate during a tax year must report the aggregate on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. A much lower threshold applies to gifts from foreign corporations or foreign partnerships, and that lower threshold is adjusted for inflation each year — the current figure is published in the Form 3520 instructions.
The mechanical rules that surprise taxpayers are the aggregation rules. Two $60,000 gifts from your father cross the individual-donor threshold together. Gifts from related foreign donors are aggregated. And Form 3520 is filed by the U.S. recipient, separately from the individual income tax return, on the same due date as Form 1040. Missing that separate filing is the single most common way a compliant household ends up with a penalty notice.
- $100,000 aggregate — the trigger for gifts and bequests from nonresident alien individuals or foreign estates
- A much lower, inflation-indexed threshold — the trigger for gifts from foreign corporations or foreign partnerships
- Aggregation across related donors — several small transfers can create a filing obligation
- Same due date as Form 1040, but a separate filing — extensions on the 1040 extend Form 3520 as well when properly filed
What did the court decide in Zhang v. IRS about a form 3520 penalty? ⚖️
The court held that IRC § 6039F itself authorizes the IRS to assess the penalty administratively, without first filing a civil suit. The ‘notice and demand … in the same manner as tax’ language was read as a direct grant of assessment authority.
The taxpayer in Zhang was a Chinese citizen and a U.S. tax resident who received $287,109 in wedding gifts from family members in China during 2017. She did not file Form 3520 for that year until 2018, after learning of the requirement. The IRS assessed the section 6039F penalty, denied her request for reasonable-cause abatement, and collected it. She paid, then sued for a refund.
Her core legal argument was structural: section 6039F is not on the short list of provisions labeled as ‘assessable penalties’ in the Code, so the IRS should have to file a civil suit to collect. The court disagreed. It read the statute’s payment language — ‘upon notice and demand by the Secretary and in the same manner as tax’ — as language that assumes and authorizes the standard assessment procedure in IRC § 6201. Congress does not have to recite the word ‘assessable’ for a penalty to be one.
The court also rejected an Eighth Amendment argument. It concluded that the section 6039F penalty is remedial, meaning it is designed to encourage compliance rather than to punish, and therefore does not trigger the Excessive Fines Clause. It did, however, leave open a narrower procedural question about whether the IRS obtained the managerial approval required before assessing a penalty. That door remains ajar for a well-preserved procedural record.
In our practice
The taxpayers who lose these fights are almost never the ones who tried to hide something. They are the ones who assumed a foreign gift was a private family matter and only spoke to an accountant after the notice arrived. By then the penalty is already on the account, and the government’s position is that it stays there unless the taxpayer proves reasonable cause. Zhang v. IRS made that ordering official — the assessment first, the abatement fight second.
How does Zhang fit with Farhy and the wider penalty-authority fight? 🧭
Farhy was a Form 5471 case decided by the D.C. Circuit in 2024. It held that a different foreign-reporting penalty was assessable by implication. Zhang applies the same reasoning to Form 3520 and IRC § 6039F, and the trend across circuits is now moving toward direct IRS assessment authority for international information return penalties.
For a short window after the Tax Court’s 2023 decision in Farhy v. Commissioner, there was real hope that a Form 5471 penalty could not be assessed without a court order — which would have forced the IRS to sue for each one, and made most such penalties uncollectible in practice. The U.S. Court of Appeals for the D.C. Circuit reversed in 2024, and the momentum has since favored the government.
Zhang v. IRS is important because it extends that direction to a different form and a different statutory section, and it does so in a district court that hears many international-taxpayer disputes. Taken together, the two decisions tell practitioners that the ‘no assessment without court’ argument is a preservation argument, not a winning first line of defense. The practical fight is on the merits of reasonable cause and the accuracy of the assessment itself.
| Case | Court | Form / IRC section | Holding |
|---|---|---|---|
| Farhy v. Commissioner | Tax Court (2023) → D.C. Cir. (2024, reversed) | Form 5471 / § 6038(b) | D.C. Circuit: penalty is assessable by implication |
| Zhang v. IRS | N.D. Cal. (May 4, 2026) | Form 3520 / § 6039F | Section 6039F itself authorizes administrative assessment |
| Direction of travel | Multiple circuits | International information return penalties | Courts increasingly read assessment authority into the statute |
What should I do the day I learn a form 3520 was missed? 🛟
File the delinquent Form 3520 as promptly as possible with a written reasonable-cause statement attached, keep every dated piece of paper about how you discovered the gift and when you acted, and prepare for the penalty to be assessed first and abated only on the strength of that statement.
Corrective filing is the first move. A late Form 3520 filed voluntarily, with a clear reasonable-cause narrative attached, sits in a different queue than one produced under audit pressure. The About Form 3520 page and the accompanying instructions describe the delinquent filing procedures for taxpayers who have already filed the underlying income tax return.
Reasonable cause is the substantive fight, and it is a facts-and-circumstances test. The IRS collects its criteria at IRS reasonable-cause guidance, and the collection procedure for international information return penalties has its own dedicated page at IRS International Information Return Penalties. A statement that succeeds usually identifies the specific gift, the specific date on which the taxpayer learned reporting was required, the source of that new information, and the corrective steps taken. Reliance on a professional adviser can be part of the story, but only when the taxpayer actually disclosed the foreign transfer to the adviser at the time.
- Write down the discovery date and how you learned — a family conversation, a bank inquiry, a new accountant onboarding
- Gather every document that establishes the amount, the donor and the date of each transfer
- File the delinquent Form 3520 with a written reasonable-cause statement attached
- Keep a copy of the mailing receipt or e-file confirmation — the assessment path assumes the government’s dates are correct unless you can rebut them
- If a penalty notice arrives before your delinquent filing is processed, respond in writing within the notice’s stated window and reference the filing
Do not wait to see whether the IRS notices
Assessment authority runs on a clock. Section 6039F carries a 5 percent per month rate up to a 25 percent cap, and interest on penalty balances accrues in addition. A voluntary late filing before contact from the IRS almost always produces a better outcome than a filing made after a notice arrives — both because reasonable cause is easier to show and because the mitigation posture is fundamentally different. If you know of a missed Form 3520, the answer to ‘when should I file’ is ‘this week’.
How does this affect Korean-American families and other cross-border households? 🌏
Directly. Wedding gifts, elder-parent living transfers, education support and inheritance distributions from Korea, China, Vietnam, the Philippines and Mexico are the most common triggers we see in Los Angeles. Zhang v. IRS makes the compliance cost of doing nothing higher than it was.
The pattern is culturally recognizable. Parents in the origin country send money to help with a down payment, cover a hospital bill, fund a wedding, or provide a lump-sum inheritance after a death. None of these transfers feel like a taxable event to the recipient — because none of them are. Form 3520 is a reporting return, not a taxing return. But the reporting failure carries its own penalty, and Zhang v. IRS has now put beyond doubt that the IRS can assess that penalty directly on your account.
For a household that receives a large transfer once every several years, the practical answer is a written checklist for the U.S. recipient. Before the money is spent, confirm the amount in U.S. dollars using a reliable spot rate on the transfer date, note the donor’s name and residency status, and add the item to the year’s tax-organizer inputs. Two receipts and a one-page memo are the difference between a routine filing and a Zhang-style penalty fight.
The short version
- IRC § 6039F imposes a form 3520 penalty of 5% per month, up to 25%, on unreported foreign gifts above the threshold
- Zhang v. IRS (N.D. Cal., May 4, 2026) confirms the IRS can assess that penalty administratively, without going to court first
- The Eighth Amendment ‘excessive fines’ argument was rejected — the penalty is treated as remedial, not punitive
- File a delinquent Form 3520 with a reasonable-cause statement the week you discover the problem, not the month after a notice arrives
Frequently asked questions ❓
Q. What is a Form 3520 penalty?
It is the civil penalty imposed under Internal Revenue Code section 6039F when a U.S. person receives an aggregate of more than $100,000 in gifts or bequests from foreign individuals or estates during a tax year and fails to report those transfers on Form 3520. The statute pegs the penalty at 5 percent of the unreported amount for each month the failure continues, capped at 25 percent, unless the taxpayer establishes that the failure was due to reasonable cause and not willful neglect.
Q. Can the IRS assess a Form 3520 penalty on its own, or must it sue in court first?
Under the May 4, 2026 decision in Zhang v. IRS, the U.S. District Court for the Northern District of California held that the IRS may assess the section 6039F penalty administratively, without first filing a civil suit. The court read the statute’s requirement that the penalty be paid ‘upon notice and demand by the Secretary and in the same manner as tax’ as language that plainly authorizes assessment. That means the penalty appears on your account first, and you have to seek relief afterward.
Q. Does Zhang change what I do differently as a taxpayer?
It reinforces that the burden of getting a foreign-gift penalty removed rests on the taxpayer, not the government. Because the penalty is now assessed and collected in the same manner as tax, the practical path is to file Form 3520 as early as possible once you discover the failure and to build a reasonable-cause statement that documents what you knew, when you knew it and why you did not file on time. Waiting for the IRS to go to court is not a strategy anymore.
Q. What amount of foreign gift triggers a Form 3520?
Two thresholds. Gifts and bequests from a nonresident alien individual or a foreign estate are reportable when the aggregate for the year exceeds $100,000. Gifts from foreign corporations or foreign partnerships are reportable when the aggregate exceeds an inflation-adjusted amount that the IRS publishes annually; the amount is much lower than the individual threshold. Both are aggregate figures, so several smaller gifts from related foreign donors can add up to a filing obligation you did not expect.
Q. What counts as reasonable cause for a late Form 3520?
Reasonable cause is a facts-and-circumstances test. In our practice the statements that succeed share three features: they identify the specific gift or bequest, they explain in plain language how the taxpayer learned that reporting was required, and they describe the corrective action taken and its timing. Reliance on a professional adviser can support reasonable cause, but only when the taxpayer disclosed the foreign transfer to the adviser in the first place. Ignorance of the law, standing alone, generally does not qualify.
Q. Does the Excessive Fines Clause of the Eighth Amendment help me?
The Zhang court concluded that a section 6039F penalty is remedial rather than punitive and therefore does not trigger the Excessive Fines Clause. That argument, popular a few years ago, is now a harder path in the Northern District of California. It is not extinguished nationally — different circuits have taken different views — but for now the more productive investment is a well-documented reasonable-cause package and, where the amount justifies it, a preserved record of managerial-approval and procedural objections.
Every household’s facts are different, and a general write-up cannot tell you whether a particular transfer triggers Form 3520 or whether reasonable cause is available in your situation. If you would like us to look at a specific set of facts, contact SW Accounting & Consulting Corp — we are a Los Angeles CPA firm working with owner-operated businesses and cross-border households across California and the wider United States.
