Failure to Report Significant Wedding Gifts from Overseas Results in Large Penalty

(Parker Tax Publishing June 2026)

A district court held that a taxpayer was liable for a significant penalty after she failed to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, to report the receipt of $288,000 of wedding gifts from relatives in China. The court rejected her claim that the IRS did not have authority to assess a penalty under Code Sec. 6039F and could only assess the penalty through a civil action. Zhang v. IRS, 2026 PTC 108 (N.D. Cal. 2026).

Background

Between June 2012 and December 2013, Jinming Zhang was a Chinese citizen living in California and attending a U.S. school. Upon completing her studies, she moved back to China but subsequently returned to the U.S. in 2014 and, in 2016, she married another Chinese citizen. She received several wedding gifts from her family in China worth approximately $287,000. Shortly thereafter, Zhang met the substantial presence test of Code Sec. 7701(b), making her subject to U.S. tax reporting requirements.

Zhang used TurboTax to timely file her 2017 U.S. income tax return. However, the tax return did not include Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Zhang was unaware that she was required to file this form. The penalty for failing to report a foreign gift is 5 percent of the amount of such foreign gift for each month the failure continues. However, under Code Sec. 6039F(c)(1)(B), the penalty cannot exceed 25 percent of such amount in the aggregate. The U.S. person must pay the penalty upon notice and demand by the IRS and in the same manner as a tax. Code Sec. 6039F(c) provides that, if someone fails to timely file the Form 3520 reporting their foreign gifts, that person must pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of such foreign gift for each month that the failure continues but not to exceed 25 percent of such amount in the aggregate. Further, taxpayers can avoid being penalized under Code Sec. 6039F if they can show that their failure to file was due to reasonable cause and not willful neglect.

When Zhang learned about the requirement to file Form 3520, she prepared and filed a belated Form 3520. The IRS then assessed a Code Sec. 6039F(c) penalty of almost $72,000, which was 25 percent of the foreign gifts reported.

A month later, Zhang's representative sent a letter to the IRS requesting penalty abatement for reasonable cause or, in the alternative, under the IRS's First Time Penalty Abatement policy. While her request was originally rejected, the IRS's Independent Office of Appeals subsequently reduced the penalty by 20 percent to $57,422 which Zhang fully paid.

In May of 2024, Zhang filed a refund claim on the basis that (1) she was entitled to a reasonable-cause defense; (2) the IRS did not satisfy the managerial-approval requirements of Code Sec. 6751(b) before assessing the penalty; (3) the IRS violated the Administrative Procedures Act (APA) when it supposedly failed to review the reasonable-cause statement submitted with her delinquent Form 3520 as part of an IRS program to encourage submissions of delinquent international information returns; (4) the IRS did not have statutory authority to assess the Code Sec. 6039F penalty and can only collect that penalty through a civil action; and (5) the penalty violated the Excessive Fines Clause of the Eighth Amendment. Since the IRS did not act on her refund claim in the six months after the claim was filed, Zhang filed suit in a district court, seeking a refund of $68,000 in taxes, interest, and penalties.

In an effort to distinguish the Code Sec. 6039F penalty from the boundaries of the IRS's authority to assess and collect under Code Sec. 6201(a), Zhang argued that Supreme Court precedent in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), showed the distinction between penalty and tax to emphasize that the Code Sec. 6309F penalty remains a penalty rather than a tax, precluding ready application of the IRS's authority under Code Sec. 6201(a).

The IRS moved to dismiss some of Zhang's claims, arguing that (1) Zhang failed to state a claim that the IRS exceeded its authority to assess and collect the penalty under Code Sec. 6039F; (2) the district court lacked subject matter jurisdiction over Zhang's claim under the APA; and (3) Zhang failed to state a claim for violation of the Eighth Amendment. However, the IRS conceded that Zhang's claims for refund based on a reasonable-cause defense and the managerial-approval requirement of Code Sec. 6751(b) should move forward.

Analysis

The district court rejected Zhang's claims and held that the language of Code Sec. 6039F(c) plainly gives the IRS the authority to assess Code Sec. 6039F penalties when read in the broader context of its authorization by Congress. The court noted that, beyond the statutory text specifying that the penalty is paid "as tax," Code Sec. 6039F provides for a reasonable cause defense similar to Code Sec. 6038's reasonable cause defense that was evaluated in Farhy v. Comm'r, 2024 PTC 141 (D.C. Cir. 2024). In that case, the D.C. Circuit reasoned 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 IRS.

The district court found that the same reasoning applied in Zhang's case - if the Code Sec. 6039F penalty was not assessable by the IRS, there would be no point in including the reasonable cause defense within the statutory text in which the taxpayer could make a reasonable cause showing to the IRS. On this key aspect, the court observed, it appeared that Congress intended for the IRS to be able to assess the Code Sec. 6039F penalty on its own without first initiating a lawsuit against the taxpayer. Ignoring that clause, the court said, 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."

The court also noted that Zhang's argument that the IRS did not have statutory authority to assess the Code Sec. 6039F penalty against her had been raised in several other foreign-penalty cases involving different provisions of the Code and had similarly failed. With respect to her reliance on the Sebelius case, the court found that the distinction between tax and assessable penalties that Zhang attempted to draw found little support in Sebelius because, although "tax" and "assessable penalty" remain conceptually distinct, the IRS can assess and collect them just the same under Code Sec. 6201(a).

As for Zhang's APA claim, the court said that a taxpayer may only advance such a claim when there is no other adequate remedy in a court. The fact that the APA precludes judicial review when there is another adequate remedy, the court said, reflects Congress' judgment that the general grant of review in the APA ought not duplicate existing procedures for review of agency action or provide additional judicial remedies in situations where Congress has provided special and adequate review procedures.

Finally, with respect to Zhang's excessive fine argument, the court noted that neither party had found any case considering the precise issue of whether Code Sec. 6039F penalties are fines. However, the court observed, tax penalties have consistently been held to fulfill a remedial purpose and are therefore not subject to the Excessive Fines Clause.

For a discussion of the information reporting rules when certain large gifts from foreign persons are received, see Parker Tax ¶203,160.

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