The Court Rules 3520 (Foreign Gift) Penalties are Enforceable

The Court Rules 3520 (Foreign Gift) Penalties are Enforceable

The Court Rules 3520 (Foreign Gift) Penalties are Enforceable

While some tax attorneys take the position that the IRS does not have the right to assess penalties against taxpayers for missed international information reporting forms, these challenges have overall been unsuccessful. That is because when challenged, most courts have taken the position that the IRS does have the right to assess and enforce international reporting penalties against taxpayers. This was the same outcome in the recent District Court case of Jinming Zhangi, which involved Form 3520 foreign gifts that the taxpayer received at the time of their wedding. In this case, the taxpayer took the position that Form 3520 penalties are improper.

The court disagreed and was very clear that their position is that the statute clearly shows the IRS is empowered to enforce Form 3520 ‘international information reporting’ penalties. Let’s take a brief look at how the court arrived at this conclusion.

*While the court did affirm that the taxpayer can proceed via reasonable cause, in general, taxpayers do not need to file lawsuits to pursue a reasonable cause submission.

Court’s Ruling re: 6039F Penalty Authorization

In 2025, the U.S. District Court for the Northern District of California, on May 4, rejected Jinming Zhang’s claims that the IRS lacks the power to assess international reporting penalties for undisclosed foreign gifts under IRC § 6039F, and that the penalty violated the Administrative Procedure Act and the Eighth Amendment’s Excessive Fines Clause.

The Foreign Gift

• • • In December 2016, Zhang married another Chinese citizen and, in September 2017, moved to California to join him in the United States. See FAC ¶¶ 39-42. By mid-December, Zhang had met the substantial presence test of Title 26 U.S.C. §7701(b), making her subject to U.S. tax reporting requirements, including, relevant here, Title 26 U.S.C. §6039F. See FAC ¶ 41. In 2017, Zhang received several wedding gifts from her family in China totaling $287,108. 

Court’s Reasoning

• • • The language of subsection (c) plainly gives the IRS the authority to assess Section 6039F penalties when read in the broader context of the earlier mentioned congressional authorization for the IRS to assess “all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.” 26 U.S.C. Section 6201(a). Indeed, “use of the word ‘include’ can signal that the list that follows is meant to be illustrative rather than exhaustive.” Samantar v. Yousuf, 560 U.S. 305, 317 (2010). Such broad, encompassing language could be read to include all exactions imposed by the Code unless Congress has specifically provided otherwise. Such language supports the conclusion that the IRS retains authority to assess the penalty described in Section 6039F. But the language in subsection (c), “upon notice and demand by the Secretary and in the same manner as tax,” more clearly establishes that this penalty is assessable for at least two further reasons.

• • • First, by saying the penalty shall be paid “upon notice and demand by the Secretary,” Congress referred to the notice-and-demand-for-payment procedure that usually accompanies an assessment of a tax or other liability by the IRS. See 26 U.S.C. section 6303 (requiring the IRS to “give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof” after an assessment of tax); see also, e.g., Michael I. Saltzman & Leslie Book, IRS PRACTICE AND PROCEDURE ¶ 10.01[1] (Oct. 2024) (explaining the IRS must give notice of the assessment and demand for payment before the IRS can use its administrative collection tools). An assessment is the “official recording” of the amount a taxpayer owes the federal government. Polselli v. IRS, 598 U.S. 432, 438 (2023); see also 26 U.S.C. section 6303.

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    • The assessment is the “cornerstone of the government’s tax collection authority.” Farhy II, 100 F.4th at 225-26. If, after notice and demand of payment, an assessment remains unpaid, the IRS “‘can employ administrative enforcement methods to collect the tax,’ including liens and levies.” Id. at 226 (quoting United States v. Galletti, 541 U.S. 114, 122 (2004)). “An IRS assessment thus serves as ‘the trigger for levy and collection efforts.’” Farhy II, 100 F.4th at 226 (quoting Hibbs v. Winn, 542 U.S. 88, 100 (2004)). It remains difficult to conceive that Congress would have included the notice-and-demand language that is so closely tied to assessments if Congress intended the penalty to be instead collected by civil lawsuit, the manner of penalty enforcement proposed by Zhang. See, e.g., Azar v. Alina Health Serv., 587 U.S. 566, 574 (2019) (“This Court does not lightly assume that Congress silently attaches different meanings to the same term in the same or related statutes.”).

• • • Second, and more importantly, the statutory language of subsection (c) proceeds to describe that a Section 6039F penalty shall be paid “in the same manner as tax.” 26 U.S.C. §6039F(c)(1)(B). By using this language, Congress clearly indicated its intent to treat this penalty as a “tax.” And by specifying the mode of recovery as tax, Congress contrasted this penalty with the default mode of penalty collection, that “[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for the violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil action.” 28 U.S.C. §2461(a). To the contrary, “all taxes” imposed by the Internal Revenue Code are assessable. 26 U.S.C. §6201(a). That includes “assessable penalties.” Id. Admittedly, not every tax-related penalty is assessable. For example, civil penalties for willful failure to pay excise taxes related to tobacco products are “to be recovered, with costs of suit, in a civil action.” Id. §5761(a). But, contrary to Zhang’s contentions, Section 6039F is not one of those rare tax-related penalties that are not assessable on its own terms.

• • • Beyond the statutory text specifying that the penalty shall be paid “as tax,” Section 6039F provides for a reasonable cause defense that is evaluated by the IRS just like Section 6038’s reasonable cause defense was evaluated in Farhy II. Id., 100 F.4th at 233 (reasoning that if the “penalty was not assessable, there would be no post-assessment administrative process in which the taxpayer could make a reasonable cause showing to the Secretary.”).

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    • The same reasoning applies here — if the Section 6039F penalty was not assessable by the IRS, there would be no point in including the reasonable cause defense within the statutory text of subsection (c) in which the taxpayer could make a reasonable cause showing to the Secretary. On this key aspect, it appears Congress intended for the IRS to be able to assess the Section 6039F penalty on its own without first initiating a lawsuit against the taxpayer.

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  • • Ignoring the clause, which leaves the IRS to evaluate the reasonable cause defense prior to suit, would render a large portion of the subsection’s language “inoperative or superfluous,” flouting the rule that a “statute should be construed so that effect is given to all its provisions.” Clark v. Rameker, 573 U.S. 122, 131 (2014) (quoting Corley v. United States, 556 U.S. 303, 314 (2009)). Therefore, the only reasonable reading of Section 6039F is that Congress intended the penalty to be assessable by the IRS. Indeed, Zhang cannot ignore the presence of that reasonable cause defense in Section 6039F — it is a foundational portion of her case that the IRS mishandled that defense as applied to her penalty. See FAC ¶¶ 34-85 (advancing claims under four headers related to application of the reasonable cause exception).

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  • • The IRS has the authority to assess the Section 6039F penalty under its own terms and when read in conjunction with Section 6201(a). The Court accordingly GRANTS the IRS’s motion to dismiss this claim.

* While the court did affirm that the taxpayer can proceed via reasonable cause, in general, taxpayers do not need to file lawsuits to pursue a reasonable cause submission, which can be presented to the IRS before a penalty is even issued.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.