Form 3520 Penalty Abatement: The IRS's October 2024 Policy Change and What It Means for a Late Foreign Gift or TFSA Report

Short version: Form 3520 Explained: Foreign Trusts, Gifts, and Inheritances

Form 3520 has two very different uses for a Canadian file: reporting a gift or inheritance above $100,000 from a Canadian relative (Part IV), and reporting transactions with a foreign trust, which for many practitioners includes a TFSA or RESP (Parts I to III, with Form 3520-A). The penalties were assessed automatically on late filings for years: 5% per month up to 25% of the gift, and 35% of trust contributions or distributions, regardless of any reasonable-cause statement attached, with the taxpayer left to seek abatement after the fact. In October 2024 the IRS Commissioner announced that the agency would stop automatically assessing the Part IV penalty on late-filed gift and bequest reports and would review reasonable-cause statements first, and that the same change would extend to Form 3520-A. The announcement changed the sequence, not the law: the penalties remain, reasonable cause remains the standard, and a late Form 3520 still needs a statement that meets it.

Key takeaways

• Form 3520 Part IV (gifts and bequests from foreign persons): required when a US person receives more than $100,000 in a year from a non-resident alien individual or foreign estate (aggregating related persons), or more than an indexed amount (about $19,570) from foreign corporations or partnerships. Penalty for late filing: 5% of the gift per month, up to 25%.
• Form 3520 Parts I to III and Form 3520-A (foreign trusts): required for a US owner of a foreign grantor trust (the TFSA and RESP under the conservative view) and for transfers to and distributions from foreign trusts. Penalties: 35% of the gross value of property transferred to or received from the trust; 5% of the trust's value for a missing 3520-A; continuation penalties after notice.
• The 2024 change: for late Part IV filings, the IRS reviews the reasonable-cause statement before assessing; the automatic assessment is ended. The Commissioner stated the change would extend to Form 3520-A. Trust-related Form 3520 penalties (Parts I to III) were not explicitly covered in the announcement and should be assumed to remain subject to assessment.
• What did not change: the penalty amounts; the reasonable-cause standard; the taxpayer's need to attach a statement; the statute of limitations on the return staying open until the form is filed.
• How to file late now: the Form 3520 with a reasonable-cause statement attached (to Ogden), or through the DIIRSP with the statement, or in a streamlined submission (which waives the penalty for the covered years).

The two uses

Gifts and bequests. A US person (a Canadian who became a US resident; a US citizen anywhere) who receives more than $100,000 in a calendar year from a non-resident alien individual or a foreign estate, aggregating gifts from persons related to each other, reports them in Part IV of Form 3520, due with the 1040 (including extensions), filed separately to the Ogden service center. No tax is due; the form is informational. A Canadian parent's help with a house, an inheritance from a Canadian estate, a wedding gift: all reportable above the threshold. The penalty for a late or missing Part IV is 5% of the gift for each month late, up to 25%.

Foreign trusts. A US owner of a foreign grantor trust reports the trust and their transactions with it annually on Form 3520 (Parts I to III as applicable) and files Form 3520-A on the trust's behalf (or a substitute 3520-A attached to the 3520) by March 15. Under the conservative position that a TFSA and an RESP are foreign grantor trusts, a US person holding either has both forms every year. The penalties: 35% of contributions to, and distributions from, the trust that were not reported; 5% of the trust's gross value for a missing 3520-A; and $10,000 continuation penalties after IRS notice.

The 2024 announcement

In October 2024 the IRS Commissioner stated that the IRS would end its practice of automatically assessing penalties on late-filed Forms 3520 reporting foreign gifts and bequests (Part IV), and would instead review the reasonable-cause statement attached to the late form before deciding whether to assess. He stated that the change would also apply to Form 3520-A. The stated reason was the volume of penalties assessed on taxpayers who had reasonable cause and the volume of abatements the IRS was subsequently granting, often after Taxpayer Advocate involvement.

The effect: a late Part IV filing with a reasonable-cause statement is now reviewed before a penalty notice issues, rather than after. A statement that establishes reasonable cause (a taxpayer who did not know a gift from a parent was reportable, whose preparer never asked, and who filed promptly on learning) results in no penalty without a fight. A statement that does not (no explanation; a taxpayer who had been told) results in assessment as before.

What did not change

The penalty amounts and the statute are unchanged. Reasonable cause remains the standard: ordinary business care and prudence, with the facts. The trust-related penalties under Parts I to III (the 35% penalties) were not named in the announcement; a late Form 3520 reporting TFSA or RESP transactions should be assumed to face assessment, and the reasonable-cause statement is the defence. The DIIRSP remains available for late information returns with reasonable cause where all income was reported, and the streamlined program remains the route where income was not.

The statute of limitations on the taxpayer's entire return stays open until the Form 3520 is filed; filing the late form closes it three years later.

Filing late now

Gift or bequest (Part IV). File the Form 3520 for the year to the Ogden address with a reasonable-cause statement attached: what was received, from whom, when; why the form was not filed (unawareness of the requirement; a preparer who did not ask; a belief that gifts are not reportable because they are not taxable); when the taxpayer learned and what they did. Under the 2024 policy the statement is reviewed first. Alternatively, file through the DIIRSP (the same form and statement, with the procedure's framing) or in a streamlined submission if other years' income was unreported.

TFSA or RESP (Parts I to III and 3520-A). File the late Forms 3520 and 3520-A for each year with reasonable-cause statements; expect possible assessment and respond with the statement; or include them in a streamlined submission, which waives the penalties for the covered years and is usually the reason a TFSA holder is in the program at all.

Responding to a notice. A penalty notice on a Form 3520 (a CP215 or similar) is answered within the notice's period with the reasonable-cause statement and a request for abatement; unresolved cases go to Appeals; the Taxpayer Advocate Service has been active on 3520 penalties.

Worked example

A Toronto-born Miami resident received $250,000 CAD from her mother in 2023 toward a condo and did not file a Form 3520; her US preparer never asked about foreign gifts. She learned of the requirement in 2026 when a cross-border advisor reviewed her file.

• Exposure. 25% of the gift (converted): about $46,000, if assessed.
• Filing. A late 2023 Form 3520 (Part IV) to Ogden with a reasonable-cause statement: the gift, the source, her unawareness, the preparer's omission, her prompt filing on discovery. Under the 2024 policy, reviewed before assessment.
• Expected result. No penalty on a credible statement; the 2023 return's statute closes three years after the filing.
• Contrast. Before October 2024: an automatic $46,000 assessment, a response, months of abatement correspondence, and often the same result eventually.

Official sources

The National Taxpayer Advocate reported that "the IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520, Part IV, which deal with reporting foreign gifts and bequests," and that the IRS would begin "reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) § 6677 penalty." — Internal Revenue Service, NTA Blog: IRS Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties (Oct. 24, 2024), https://taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10

The IRS states that U.S. persons file Form 3520 to report "certain transactions with foreign trusts" and the "receipt of certain large gifts or bequests from certain foreign persons." — Internal Revenue Service, About Form 3520, https://www.irs.gov/forms-pubs/about-form-3520

The IRS states that taxpayers "may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted," that such returns "will not be automatically subject to audit but may be selected for audit through the existing audit selection processes," and that "penalties may be assessed in accordance with existing procedures." — Internal Revenue Service, Delinquent International Information Return Submission Procedures, https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures

Practitioner note

The 2024 change moved the reasonable-cause review to the front of the line for foreign gifts, which is where it belonged, and left the trust penalties where they were. We file every late Form 3520 with a statement that would survive assessment, because for the TFSA it still has to, and for the gift it now decides the matter before a notice is ever printed.

See also: For the full picture of what each agency charges, see late-filing penalties on both sides of the border, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the late Form 3520 filings with reasonable-cause statements, the response to any penalty notice, and the streamlined submission where the TFSA or RESP forms are part of a larger catch-up. See cross-border pricing or book a call.