The headline number

Under IRC § 6039F, the penalty for failing to file Form 3520 is the greater of $10,000 or 5% per month of the gross reportable amount, capped at 25% of the total.

On a $200,000 inheritance from a foreign grandparent, the maximum penalty is $50,000. On a $1 million foreign gift it is $250,000. The penalty is the largest single financial risk most foreign-gift recipients face.

When the penalty applies

The penalty applies if any of the following is true:

You failed to file Form 3520 at all.
You filed late and the IRS has not granted reasonable-cause abatement.
You filed but the form was substantially incomplete (missing required information about the donor, the gift amount, or the date).
You filed but the values were materially incorrect.

The penalty is per-form, per-year. If you missed Form 3520 for three years running, you could face the penalty three times.

How the IRS finds out

People assume Form 3520 is low-risk because the IRS does not match it to anything obvious. That is not how it works in practice. The IRS finds out through:

FBAR cross-checking. If you received a foreign gift and parked the money in a foreign bank account that triggered FBAR, the FBAR shows the foreign source and the IRS asks where the money came from.
Form 8938 cross-checking. Same idea, different threshold — Form 8938 is filed with your 1040, so the IRS sees it automatically.
Bank Secrecy Act reporting. US banks report incoming international wires over certain thresholds to FinCEN. The IRS has access to that data.
Foreign Account Tax Compliance Act (FATCA) reporting. Foreign banks report your US-person status to the IRS. If a foreign bank account exists in your name and shows large inflows, the IRS notices.
Random audit selection. Less common but happens.

You do not want to bet against the IRS catching it.

How the penalty is calculated

Example: You received a $300,000 foreign gift in 2025. You did not file Form 3520. It is now January 2027.

Months late: from May 1, 2026 (after the April 15, 2026 deadline) to January 1, 2027 = 8 months.
5% × 8 = 40%, capped at 25%.
Penalty = $300,000 × 25% = $75,000.

The cap kicks in at month 5. After that, the penalty does not grow further — but it does not shrink either. Once you are at 25%, you stay at 25% until you file (or the statute of limitations runs out, but for unfiled returns there is no statute of limitations).

What happens if you file late but with the IRS

The penalty stops accruing the moment you file. So if the IRS has not assessed the penalty yet (most common case for late filers), filing late immediately caps your exposure at whatever the calculation gives on that date. If you file in month 3, you cap at 15%. If you file in month 7+, you cap at 25%.

If the IRS already assessed the penalty before you filed, you can request reasonable-cause abatement in writing — see our separate post on reasonable cause.

Reasonable cause defenses that work

The IRS will consider abatement if you can show:

You relied on a tax professional who failed to advise you about Form 3520.
You were hospitalized, incapacitated, or in a documented family emergency.
You experienced a natural disaster.
You filed Form 3520 timely but the IRS misplaced it (rare; needs USPS proof).

What does not work:

"I didn't know about the form."
"The amount didn't seem big enough."
"My CPA didn't ask."
"I filed my regular tax return so I thought I was done."

Bottom line

The $99 cost of using our app vs. a 25% penalty on the gift is the cheapest insurance in tax compliance. Even a free do-it-yourself filing beats not filing. The penalty is what makes this form matter.

3520file is software, not a CPA firm or law firm. We prepare IRS Form 3520 based on the facts you provide. For advice on your specific situation, talk to a tax attorney or CPA. The above is plain-English explanation, not tax advice.

Form 3520 Penalty in 2026: The 25% Hit Most Filers Don't See Coming