3520 Part IV Penalty Abatement: The October 2025 IRM Reset

The IRS updated the Internal Revenue Manual in October 2025 to suspend automatic penalty assessment for late Form 3520 Part IV foreign gift and inheritance filings. The change is administrative policy, not statutory.

The Internal Revenue Manual is the policy handbook IRS personnel use in their performance of official duties, such as processing delinquent Forms 3520. When a late Form 3520 arrives at the Ogden, Utah service center, IRS employees should be following the relevant IRM section and the procedures listed therein as they process the delinquent forms. For Part IV filings, that procedure now reads differently than it did prior to the recent change. The exact IRM section is 21.8.2.19.2 (10-01-2025).

The IRM update followed a period of public pressure from the National Taxpayer Advocate and the tax practitioner community, and was first announced in October 2024 when then-Commissioner Danny Werfel told the audience at the UCLA Extension Tax Controversy Conference that the IRS would stop assessing these penalties automatically. The IRM update a year later is the long-anticipated written confirmation of that policy.

The data behind the pressure was hard to ignore. According to the National Taxpayer Advocate, the IRS abated 67% of Form 3520 Part IV penalties assessed between 2018 and 2021, and abated 78% of the dollars assessed during that period. The IRS was abating over $179 million in Part IV penalties annually before the policy change. A penalty regime where the IRS reverses more than three out of every four dollars it assesses is one in which the assessment itself is the problem. The assessment, abatement, and appeals process resulted in significant wasted resources by the IRS and taxpayers, ultimately resulting in abatements.

The October 2025 IRM update is a welcome policy correction. When a U.S. person now files a late Form 3520 reporting a foreign gift or inheritance, the IRS should not assess a penalty under the new policy.

What did not change: the underlying statute. IRC § 6039F still authorizes the IRS to assess a maximum 25% penalty against any Part IV late filer. The IRM is a manual, not the law. The IRS retains the statutory authority to penalize, should the IRS fail to adhere to their policy or revise the policy in the future. It is therefore important to consider submitting a robust reasonable cause statement with any delinquent Part IV Form 3520.

Form 3520 is required when a U.S. person transfers to, owns, or receives distributions from a foreign trust, or receives foreign gifts above the stated thresholds. There are four ways a U.S. person can be required to file Form 3520:

The first three triggers fall under IRC § 6048, which governs information reporting for foreign trusts. The fourth, the foreign gift or inheritance trigger, falls under IRC § 6039F. The distinction matters because the penalty structures and the October 2025 IRM update do not apply symmetrically.

For Part IV foreign gift reporting, the thresholds are:

Form 3520 is filed separately from the U.S. person’s income tax return, even though it shares the same due date (for Part IV filers). For a calendar-year filer, that is April 15 of the year following the tax year in question. With extensions, the form can be filed as late as October 15. The form is mailed (not e-filed) to the IRS service center in Ogden, Utah (see Form 3520 instructions).

Most of the Form 3520 work landing on our desks has historically involved Part IV foreign gifts. “Part IV Form 3520 penalties is what we see the most of,” says Eli Noff. That is where the October 2025 IRM update applies. It is also the side where potentially a large number of penalties were assessed against ordinary taxpayers over the last several years.

Foreign gift penalties under IRC § 6039F cap at 25% of the gift value (5% per month of late filing). Foreign trust penalties under IRC § 6677 reach the greater of $10,000, 35% of certain transactions, or 5% of the gross value of certain assets within the trust. See IRS Form 3520 instructions for additional information regarding the potential penalties. The most favorable October 2025 IRM update applies to the gift side only.

The two penalty structures look similar on the surface and behave differently in practice. The foreign gift penalty under IRC § 6039F(c) is 5% of the gift value per month, capped at 25%. A $200,000 unreported gift generates a $50,000 penalty at the cap. A $1,000,000 unreported gift generates a $250,000 penalty at the cap. The penalty runs only against the U.S. recipient, even if the foreign donor had no U.S. tax obligation and the recipient owed no income tax on the gift.

The foreign trust penalty under IRC § 6677(a) operates differently against various trust assets or transactions.

The previously discussed favorable October 2025 IRM update applies only to Part IV (the foreign gift side). The IRS did not change its treatment of late-filed Form 3520 trust filings or Form 3520-A. As Eli Noff puts it: “On the foreign trust side, if you file a late 3520 or 3520-A related to foreign trust interests, the IRS is not quite as liberal there. It did not change the penalty policy there. Anecdotally, I’m hearing that the penalties are still being issued for late 3520s related to foreign trust activities.”

What that means in practice: a U.S. person with a delinquent foreign gift report and a delinquent foreign trust report sits in two different policy worlds simultaneously. On the one hand, the gift section (Part IV) receives the benefit of the IRM policy update. The trust sections (Part I and/or Part III) do not.

For Forms 3520 and 3520-A combined, the National Taxpayer Advocate reports the IRS abated 67% of penalties assessed between 2018 and 2021 and 54% of dollars assessed. Annualized, that is over $224 million in abated penalties.

Beginning around 2020, the IRS began assessing the maximum Part IV 25% penalty automatically on late Form 3520 Part IV filings with an open statute, regardless of taxpayer circumstances or reasonable cause statements submitted. The October 2025 IRM update ends that practice administratively.

Prior to 2020, a U.S. person who filed a late Form 3520 with no associated unreported income could submit through the Delinquent International Information Return Submission Procedures (DIIRSP). The IRS generally did not assess penalties on DIIRSP submissions. The system worked. Sometime around 2020, that system stopped working.

The shift was not formal. There was no announcement. The IRS simply began applying the maximum penalty across the board, and tax practitioners were left to request abatement, appeal, or litigate every case individually.

The cost to taxpayers was significant. According to the National Taxpayer Advocate’s August 2023 blog post on international information return penalties, the IRS assessed more than 3,700 IRC § 6039F penalties against individual taxpayers between 2018 and 2021, totaling over $844 million. The average penalty was $226,000.

The income distribution was the data point that drove the change in policy. 92% of these penalties were assessed against individual taxpayers (not corporations). Of those individual assessments, 89% fell on lower- and middle-income taxpayers (under $400,000 in total positive income). The pattern:

The average penalty for taxpayers earning $50,000 or less was $226,000. For taxpayers earning $50,001 to $400,000, the average was $241,000. A 25% penalty against a $1,000,000 gift is the same dollar figure whether the recipient earned $40,000 last year or $400,000. The penalty regime affected low-net-worth and high-net-worth cases the same.

That era is what the October 2025 IRM update is meant to end. The pressure from the National Taxpayer Advocate, the tax practitioner community, and the underlying data made the policy untenable. The IRS responded.

Reasonable cause is the statutory defense to Form 3520 Part IV penalties. It does not depend on administrative policy and remains the primary defense if the IRS makes a Form 3520 penalty assessment. The October 2025 IRM update is encouraging. It is also reversible.

Translation: Do not rely solely on the updated IRS policy. Build the reasonable cause defense as if the IRS will assess a penalty.

Reasonable cause has a statutory anchor in IRC § 6039F(c)(2), which exempts a failure that is “due to reasonable cause and not willful neglect.” Treas. Reg. § 301.6651-1(c) operationalizes the standard: a taxpayer establishes reasonable cause by showing they exercised “ordinary business care and prudence” but were unable to comply.

What that looks like in practice depends on the facts and circumstances. The leading Supreme Court case, United States v. Boyle, 469 U.S. 241 (1985), generally distinguishes between two kinds of reliance on a tax professional:

Neonatology Associates v. Commissioner, 115 T.C. 43 (2000), gave the three-part test for professional-reliance reasonable cause: (1) the professional was competent and had sufficient expertise; (2) the taxpayer provided the professional with necessary and accurate information; (3) the taxpayer actually relied in good faith on the professional’s judgment.

Various cases have addressed reasonable cause over the years in different penalty settings. A client’s specific facts and circumstances will determine the strength of their reasonable cause position.

A reasonable cause statement attached to a late Form 3520 is a written submission that builds the record for whatever review may follow. Treat it as a memorandum to a future reader who has the authority to assess a penalty.

Before filing a late Form 3520, a tax attorney evaluates the taxpayer’s entire offshore reporting footprint and selects the compliance pathway that minimizes total exposure, considering all facts and circumstances.

A Form 3520 problem may be part of a broader compliance issue. The U.S. foreign-asset reporting regime is layered, and the question of “how do I fix my missed Form 3520?” may raise a second question: “is there anything else I missed?”

The forms in scope:

Each of these has its own penalty regime and its own reasonable cause framework. A taxpayer who missed Form 3520 sometimes also missed Form 8938 or FBAR filing obligations.

Once the footprint is mapped, the compliance pathway is selected. The four main pathways:

The selection is not interchangeable. The Streamlined procedures certify non-willful conduct. Filing under Streamlined when conduct was willful can constitute a false statement. Voluntary Disclosure requires admission of willfulness and triggers a substantive civil penalty and examination. DIIRSP is relevant only when there is no associated unreported income.

Eli Noff frames additional considerations before any late Form 3520 is filed: “Ensure A, the client is, in fact, required to file this form, because sometimes certain people are not. B, verify they are getting the right number on that form since a potential penalty is based on the amount of gift or inheritance. And C, ensuring that the client understands the risks of filing that form, regardless of the current IRS policy of lack of enforcement.”

Check A matters more than it sounds. The U.S. tax definitions of “foreign trust,” “foreign gift,” and “U.S. person” do not always match a taxpayer’s intuitive understanding. Confirming the filing obligation before submitting is part of the case.

Check B (the right number on the form) sounds mechanical and is not. Valuation of a foreign gift or inheritance carries judgment calls that affect the penalty exposure if penalties are later assessed.

Check C (the client understands the risk) is the conversation that defines the engagement. Under current policy, an isolated Part IV gift filing is unlikely to trigger a penalty. The client should understand the worst case scenario before filing.

The window of administrative relief is open, but potentially reversible. Coming forward voluntarily, evaluating the full situation with an attorney, and choosing the right compliance pathway is important.

If you have learned that you should have filed a Form 3520 in a prior year, you are likely experiencing a significant amount of stress and anxiety.

“There’s only one way to get to the other side of the problem, and it’s through,” Eli Noff says. Even if the IRS never assesses a penalty, the unfiled form remains exposure due to the operation of assessment statutes. A future audit, a future event, or future immigration considerations can surface the issue years later, under potentially less favorable conditions.

The path through has three components:

The future landscape of this particular Form 3520 Part IV penalty regime is uncertain, but the changes to date are encouraging.