IRS Form 3520 and 3520-A Penalty Appeal and Abatement Procedures
By Jason Kovan · May 9, 2023
A practical overview of reviewing, appealing, and seeking abatement of an IRS Form 3520 or Form 3520-A penalty.
Begin with the notice and the record
An appeal or abatement request should start with the exact IRS notice, not a generic explanation of foreign reporting. Identify the tax year, form, transaction, penalty provision, response deadline, and office handling the matter. Determine whether the IRS says the return was late, missing, incomplete, or inaccurate, and preserve proof of anything already filed.
The factual review should include the trust instrument and amendments, trustee or donor correspondence, bank records, transfer documents, valuations, prior returns, and communications with tax advisers. A dated timeline can reveal when information became available, what the taxpayer understood, and how quickly the taxpayer acted after learning of the problem.
Prepare a written statement of reasons
The response should explain why the penalty is wrong or why relief is appropriate. It may challenge the IRS calculation, establish that the filing was timely, show that the transaction was reported, correct incomplete information, or request abatement based on reasonable cause. The statement should address the IRS’s stated position directly and identify the documents supporting each material fact.
Reasonable cause is not a formula. The taxpayer generally needs to describe the circumstances that prevented compliance, the precautions taken, the advice or information relied upon, and the corrective steps taken once the failure was discovered. A credible statement distinguishes an understandable failure from willful neglect and avoids overstating facts that the records cannot support.
File promptly and answer follow-up requests
Follow the instructions on the notice for where and how to file the response. Keep a complete copy, proof of delivery, and a record of the date sent. If the IRS requests additional information, answer the request carefully and within the stated period. The follow-up response should stay consistent with the original timeline and explain any foreign documents that are unavailable or require translation.
Submitting a late response can limit options, even when the underlying position is strong. If more time is needed to collect records or obtain information from a foreign trustee, the taxpayer or authorized representative should consider asking the IRS for additional time before the deadline expires.
Appeals conferences and Collection Due Process
If the initial response does not resolve the matter, an Appeals conference may provide an opportunity to present the facts to an independent IRS Appeals officer. The conference is not a substitute for a well-supported record; the taxpayer should be prepared to discuss the notice, the filing history, the legal basis for relief, and the evidence in an organized way.
When the penalty has moved into collection, a Collection Due Process hearing may offer another procedural avenue, depending on the notice and the taxpayer’s rights at that stage. Deadlines and available arguments vary. The correspondence should be reviewed promptly so that a taxpayer does not assume that an appeal or abatement request automatically pauses collection activity.
Why representation can matter
An accountant can be essential in reconstructing values, preparing returns, and explaining financial records. A tax attorney can add a different layer of protection and strategy when the matter involves a penalty dispute, legal interpretation, IRS correspondence, or the possibility of escalation. Communications with the IRS are not privileged simply because an accountant is involved.
Attorney-client privilege is not absolute and depends on the relationship and purpose of the communication, but beginning with counsel can help keep the legal analysis and sensitive facts within an appropriate confidential framework. The right team may include both an attorney and a CPA, with each professional handling the work for which they are best suited.