Category Archives: Tax Penalties

Late Form 3520: What Records Support a Reasonable-Cause Request?

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Posted by
Philip Falco

A reasonable-cause request begins with an accurate history and supporting records. Before drafting an explanation for a late Form 3520, confirm the reporting requirement, the applicable deadline, and the facts that caused the omission. A generic letter cannot supply missing evidence.

This article provides a records checklist. Our Form 3520 guide explains the broader reporting and penalty rules; the delinquent-return guide covers correction procedures.

First Confirm That a Required Filing Was Missed

Review residency, donor identity, ownership, gift characterization, value, and aggregation. A large overseas wire is not enough to establish every element. Identify the affected year and check extensions or special relief against documentary proof.

If the recipient was moving to the United States, begin with the residency timeline. If relatives transmitted the funds, map the actual donor and intermediary chain.

Build a Chronology Before Writing the Explanation

  1. Transaction: when did the gift or other covered event occur, and what records establish it?
  2. Original filing period: what did you do to identify obligations and prepare returns?
  3. Advice: whom did you consult, what information did you provide, and what advice did you receive?
  4. Omission: what specific circumstances prevented or affected compliance?
  5. Discovery: when and how did you learn that a form might be missing?
  6. Correction: what steps did you take, on what dates, and what remains outstanding?

Separate documents from recollection. Mark a date as approximate when necessary. A chronology that acknowledges gaps is more useful than one that creates false precision.

Match Each Important Statement to Evidence

  • Prior returns and filing acknowledgments.
  • Extension requests and acceptance records.
  • Preparers’ questionnaires, engagement scopes, and correspondence.
  • Documents supplied to advisers and proof of when they were supplied.
  • Bank, gift, ownership, and immigration records relevant to the obligation.
  • Records supporting any illness, disruption, or access problem actually relied upon.
  • IRS notices, envelopes, response dates, and proof of corrective filings.

If your explanation concerns professional advice, distinguish advice about the income-tax treatment of a gift from advice about Form 3520. Record the question asked and the information the adviser had. Do not turn silence or an assumption into an affirmative instruction that was never given.

What the Current IRS Procedure Says

The IRS directs eligible taxpayers with delinquent international information returns to follow normal filing procedures, with Forms 3520 and 3520-A filed under their own instructions. Current guidance says reasonable-cause statements attached to those two forms are considered before a penalty is assessed and instructs filers to identify the attachment on the first page. See the IRS delinquent information-return procedures.

This is not guaranteed relief. Section 6039F provides a reasonable-cause exception to the foreign-gift reporting penalty where the failure was not due to willful neglect. The taxpayer must support the applicable standard. Foreign-trust events involve different statutory provisions and need separate analysis.

Language Difficulties and Lack of Awareness Are Facts to Examine

Describe actual communication difficulties, attempts to obtain advice, and what the person understood at the time. Avoid asserting that limited English or unfamiliarity with a form automatically establishes reasonable cause. Explain the connection between the circumstances and the missed filing, with records where available.

A written explanation should also distinguish why the omission occurred from why it continued. Identify discovery and subsequent action rather than stopping the chronology at the original deadline.

A Working Checklist for Your Consultation

Prepare four short lists: established facts; supporting documents; missing records; and unresolved questions. Bring the complete IRS notice if one has arrived. Identify any response deadline at the outset.

If foreign income was omitted or other forms were missed, assess the broader compliance problem before choosing a filing package. IRS contact, examination status, and the facts surrounding the conduct can affect the available approach. See international tax penalties.

Frequently Asked Questions

Is a template reasonable-cause letter enough?

A template can organize headings. It cannot establish your history, evidence, or the applicable legal standard.

What if I have already received a penalty notice?

Preserve the notice and its deadline. A response to an assessed penalty needs review of that procedural posture.

Should I state uncertain facts as definite?

No. Identify the uncertainty and the evidence needed to resolve it.

Discuss the Filing History and Supporting Evidence

Schedule a $500 Tax Attorney Consultation with Philip M. Falco, Attorney & CPA. Up to one hour of total attorney time includes review, analysis, preparation, and the telephone consultation combined. Preparation, filing, notice responses, and ongoing representation require a separate written engagement.

General information, updated October 9, 2026. Reasonable-cause relief depends on the form, applicable law, facts, evidence, and procedural posture.

Accuracy Related Penalty IRC 6662(a): 5 Tips

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Posted by
Philip Falco

5 Tips by Tax Lawyer Philip Falco:

  1. Scan all of your receipts and email the questionable expenses to your CPA for review.
  2. Keep a mileage log and provide the actual log to your CPA.  Telling your CPA what your mileage was is not enough to avoid the IRC 6662(a) accuracy related penalty.
  3. Work with a CPA who has integrity and who will be willing to “fall on the knife” if he gave you incorrect tax advice.  Everyone makes mistakes, not everyone is willing to own up to them.
  4. Categorize your expenses all year long.  If you are not sure if something is a business expense, ask right away and properly categorize it.  It is up to the taxpayer to show the IRS you properly categorized an expense.  This seems simple but is subtly complex.  The IRS will willingly categorize an expense as personal unless taxpayer shows otherwise.
  5. Evidence is the name of the tax game.  In the digital age, there is no excuse for not archiving old receipts.  These documents can be critically important many years down the road.  Keep them, especially those pertaining to rental real estate (purchase, improvements) and business expenses.  Really any real estate evidence should be archived since an owner occupied real estate holding can be converted to a rental.  If so, adjusted basis (ex depreciation) becomes very important.

Accuracy Related Penalty IRC 6662(a)

Section 6662(a) imposes an accuracy-related penalty equal to 20% of the underpayment to which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to, among other things, negligence or disregard of rules or regulations. Sec. 6662(b)(1).  Underpayment of tax is typically attributable to negligence.

IRC Section 6662(c) provides that “[f]or purposes of section 6662, the term ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term ‘disregard’ includes any careless, reckless, or intentional disregard.”

Negligence also includes any failure to exercise ordinary and reasonable care in the preparation of a tax return or any failure to keep adequate books and records and to properly substantiate items. Sec. 1.6662-3(b)(1), Income Tax Regs.

Burden of Proof

Section 7491(c) provides that the Commissioner bears the “burden of production” with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his “burden of production”, however, the “burden of proof” remains with the taxpayer, including the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Exception: Reasonable Cause for Taxpayer’s Position

Section 6664(c)(1) provides that the penalty under section 6662(a) shall not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith with respect to that portion. See Higbee v. Commissioner, 116 T.C. at 448. The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners have the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Reasonable cause can be reliance on a CPA’s tax advice.  However, for reliance to be reasonable, “the taxpayer must prove by a preponderance of the evidence that the taxpayer meets each requirement of the following three prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99.

As an example, if a taxpayer tells his CPA about mileage without also giving the CPA a mileage log, this has been held to be not sufficient, and the accuracy related penalty was imposed.

It is up to the taxpayer to show that he provided his CPA with sufficient documentation of a deduction.

Practical Effect: Your CPA will have to write a letter to the IRS, be interviewed by the IRS, or testify in Tax Court (or US District Court) to adequately present this approach.

Meticulous bookkeeping is critical for taxpayers in the 21st Century.  Please feel free to ask us about our bookkeeping, accounting, and tax services.

Related IRS Penalty and Audit Resources

Accuracy-related penalties often depend on return positions, documentation, reasonable cause, professional advice, and what occurred during the IRS examination.