The IRS Penalized Me for a Late Form 3520 on My TFSA. Can I Fight It?

Yes, there are routes back, and which one you use depends on whether you’ve paid. A section 6677 penalty is assessable, meaning the IRS can charge it without first sending a proposed notice you get to argue about. So the assessment you’re holding may have been made before a person read anything you wrote. Reasonable cause is a statutory bar that applies once it’s shown, and Rev. Proc. 2020-17 carries its own abatement route. Both have clocks.

What is the penalty the IRS just assessed, and how big can it get?

It’s almost certainly a section 6677 penalty. For a missed report of a transfer to a foreign trust or a distribution from one, the initial charge is the greater of $10,000 or 35 percent of the gross reportable amount. For the failure to make sure a Form 3520-A got filed, the same floor applies with 5 percent in place of 35 percent, and the IRS applies that same 5 percent to Form 3520 Part II, the ownership part, which is the likelier branch on a TFSA. On a TFSA the percentage is usually small and the $10,000 floor is what stings, and each Part of the form counts as its own penalized requirement.

Per IRC 6677(a), the filer “shall pay a penalty equal to the greater of $10,000 or 35 percent of the gross reportable amount”. Under 6677(b), for a return required by section 6048(b) the statute is “applied by substituting ‘5 percent’ for ‘35 percent’.”

The limit sits in the same subsection and is the part most pages leave out. Aggregate penalties for a failure “shall be reduced as necessary to assure that the aggregate amount of such penalties do not exceed the gross reportable amount”, and any excess already collected gets refunded. For an ownership failure the gross reportable amount is the year-end value of the portion of the trust treated as yours (IRC 6677(c)), so on a trust-form TFSA it tracks the account value rather than any contribution figure. The IRS’s own examiner manual reads that cap the same way: “In cases where the gross reportable amount is less than $10,000 the initial penalty is equal to the gross reportable amount”, and “the maximum penalty (both initial penalty and continuation penalty combined) for each failure per year is the gross reportable amount” (IRM 20.1.9.13.4). The manual is guidance the IRS writes to its own staff, so it binds nobody, but it tells you how the people reading your file are trained to read the statute.

There’s a second charge that only starts if you keep not filing. If the failure continues more than 90 days after the day the IRS mails notice of that failure, another $10,000 accrues for each 30-day period, and it keeps accruing “until a complete and accurate Form 3520 is received by the Service, or the penalty equals the gross reportable amount”. Filing the missing form is what stops that clock.

The $10,000 is not indexed. The Instructions for Form 3520 (12/2025) still print it flat, and the same instructions send you elsewhere for the separate inflation-adjusted foreign-gift threshold, which is the giveaway that this one carries no adjustment.

Why did this land before anyone read my explanation?

Because Congress took this penalty out of the deficiency process. Section 6677(e) says the deficiency procedures “shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a)”, so there’s no proposed notice, no Tax Court petition before you pay, and no built-in pause. The IRS’s manual is blunt about what that means in practice.

IRM 20.1.9: “Assessable penalties are paid upon notice and demand. For assessable penalties, there is no 30-day letter, no agreement form, and no notice requirements prior to assessment.”

The Taxpayer Advocate documented what followed from that. Writing in October 2024, the National Taxpayer Advocate recorded that “the IRS does not consider any reasonable cause statements or other information provided by taxpayers prior to assessing the penalties, even when attached to the returns”, and that “since IIR penalties are not assessed through the deficiency procedures, taxpayers had no preassessment legal avenue to challenge the penalties.”

The same post announced a change. The IRS said it would “begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) 6677 penalty”, by the end of 2024. That’s what was announced. Whether it was running as described on the day your notice was generated isn’t something the IRS publishes. What the change does tell you is that a first abatement request is often the first time a human being at the IRS actually reads your file, which is a reason to write it as though it’s the only one you get.

What clock am I actually on?

Look at your notice. The IRS’s international information reporting penalties page tells you to write “a letter stating why we should reconsider the penalty” and sends it to the address on the notice, then adds: “If a notice or letter we sent you has instructions or deadlines for disputing the penalty, pay careful attention. You must follow the instructions to dispute the penalty.” There is no published generic window. The date on the paper is the date.

The clock	What it runs from	What it does
The response deadline on your notice	The notice date printed on it. The IRS publishes no generic CP15 window and directs you to the notice’s own instructions	Governs when your first written dispute is on time
The Appeals clock	The letter REJECTING your request to remove the penalty, which is a later document than the assessment notice. The IRS’s instruction is to “refer to your rejection letter for the specific deadline”, and the published general figure is 30 days from the date of that letter	Governs when you can take a refused request to the Independent Office of Appeals
The 90-day continuation clock	The day the IRS mails notice of the failure	After it expires, $10,000 accrues per 30-day period until a complete and accurate form is filed or the gross reportable amount is reached
The refund-claim clock	3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later; 2 years from payment where no return was filed	Governs how far back a claim for the money can reach
Interest	Runs on the penalty, though the IRS says the start date “varies by the penalty type and amount”	It grows the balance until you pay in full, and the IRS says it “cannot remove or reduce interest unless the penalty is removed or reduced”

Note the second row. It’s where most write-ups go wrong. The IRS’s penalty appeal page puts the deadline in your rejection letter and tells you to read it there: “Refer to your rejection letter for the specific deadline.” The 30 days is the general figure printed alongside it, “You generally have 30 days from the date of the rejection letter to file your request for an appeal”, and that page frames its own eligibility list around failure-to-file and failure-to-pay penalties rather than section 6677, so the letter is what you work to. It is not, either way, a 30-day fuse on the assessment notice itself. Appeals does take these before you pay: IRM 20.1.9 records that “Appeals currently provides a prepayment, post assessment appeal process for all international penalties.”

If your notice prints no dispute deadline at all, that silence doesn’t time-bar the request on its own; the outer limits are the sections 6511 and 6402 periods that bound any claim for the money.

One practical point from the same manual. It advises examiners that “reasonable cause not be considered until the taxpayer has filed the complete and accurate information required for all open years”. A request that arrives while the forms are still missing is arriving before the IRS is trained to look at it.

Does Rev. Proc. 2020-17 get my TFSA out of this?

It has a route built specifically for penalties already assessed, and whether your TFSA can walk it is the unsettled part. Section 6 of Rev. Proc. 2020-17 lets an eligible individual “request an abatement of the penalty assessed, or a refund of the penalty paid, under section 6677 by filing Form 843”, and it works “without regard to whether such failure was due to reasonable cause under section 6677(d)”. It is a separate track from the reasonable-cause argument rather than a version of it.

• The mechanics are spelled out, but the form has been renumbered since. The revenue procedure says to “write the statement ‘Relief pursuant to Revenue Procedure 2020-17’ on Line 7 of the form”, and that “Line 7 should include an explanation of how the eligible individual meets each relevant requirement” and how the trust meets its requirements, mailed to Internal Revenue Service, Ogden, UT 84201-0027. On the current Form 843 (Rev. December 2024) those numbers have moved: the statement and the explanation go on Line 8, “Explain why you believe this claim or request should be allowed”, the Internal Revenue Code section goes on Line 6, and Line 7 is a set of reason boxes where 7c, “Reasonable cause or other reason allowed under the law can be shown”, is the one to check.
• It reaches back. The revenue procedure “applies to all prior open taxable years, subject to the limitations of section 6511”, and the relief itself is “subject to the limitations of sections 6402 and 6511”.
• It has a gate. “Only eligible individuals described in section 5.02 of this revenue procedure … may rely on this revenue procedure”, which generally means someone compliant on their returns who reported the account’s income. If the TFSA’s income never reached a 1040, this route is weaker before you start.

The fit itself is not settled at source in either direction. No IRS guidance names the TFSA either way as an applicable tax-favored foreign trust, and the Form 3520 instructions name specific Canadian plans only under a different revenue procedure. Its two categories, one keyed to contributions out of earned income and one to medical, disability or educational purposes, both sit awkwardly against a general-purpose TFSA, so the text cuts against the fit while no authority closes the question. We work that through in whether a TFSA is a foreign trust at all, and that guide, not this one, is where the position question belongs.

The 2024 proposed regulations that added a small-account category don’t rescue an old year either. A taxpayer “may rely on these proposed regulations for any taxable year ending after May 8, 2024”, so a penalty for a year that closed before that date sits outside them (REG-124850-08).

What counts as reasonable cause for a missed Form 3520?

The statute is short and the bar is real. IRC 6677(d): “No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect.” Two things are ruled out by name. A foreign country’s penalty for disclosing the information isn’t reasonable cause, and neither is a foreign trustee refusing to hand over what you need. Everything else is facts and circumstances, and the burden of showing it is yours.

• Not knowing, on its own, is not enough, but it isn’t nothing either. IRM 20.1.1 says “reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances”, and lists “the level of complexity of a tax or compliance issue” among the factors. It also allows reasonable cause where “the taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement”.
• “My accountant never told me” is weaker than people expect. The IRS’s own penalty relief page lists reliance on a tax professional among the reasons that don’t generally qualify: “You’re generally responsible for complying with tax law even if someone else handles your taxes.” The manual says the same, that relying on another party “is not a basis for reasonable cause … since the taxpayer is responsible for meeting their tax obligations and that responsibility cannot be delegated”. The proposed regulations soften it slightly and no further: advisor advice “is a factor that may be taken into account”, and reliance “can only constitute reasonable cause … if, under all the circumstances, the reliance was reasonable” under the section 1.6664-4(c) standard.
• First Time Abate does not reach this form. IRM 20.1.1 names Form 3520 and Form 3520-A on the list of returns where the FTA waiver “is NOT applicable”. Nor does its replacement: the Automatic Exemption from Penalty program the IRS began phasing in on July 8, 2026 covers failure-to-file, failure-to-pay and failure-to-deposit penalties, so there is no first-time waiver you can request on this form.
• Expect to sign it. Under the proposed regulations the reasonable cause statement goes to the Commissioner “under penalties of perjury”, judged “under the principles set out in Sec. 1.6664-4 and Sec. 301.6651-1(c)”. Write it accordingly.

I already paid it. Is it too late?

Paying doesn’t close the door, it changes which door you use. A paid penalty is pursued as a refund claim rather than an abatement request, and the IRS names the vehicle itself: “If you pay the penalty, you may file Form 843, Claim for Refund and Request for Abatement”, enclosing a letter explaining why the penalty doesn’t apply, a copy of the notice, and supporting documents. The limitation period is the one that governs claims generally, so the clock is different from the one on your notice.

Where you are	The route the IRS names	The clock that governs it
Notice received, penalty unpaid, no request made yet	Written request to reconsider, to the address on the notice; or the Rev. Proc. 2020-17 abatement on Form 843 if the account and the individual qualify	The deadline printed on the notice. Separately, if the IRS has mailed a notice of the failure, the 90-day continuation clock runs until the missing forms are filed
Notice received, penalty paid	Claim for refund on Form 843, with the letter, the notice and the documents; the Rev. Proc. 2020-17 refund request uses the same form	2 years from the date you paid. That is the operative limb here, because no return is filed for an assessable penalty. IRC 6511 also carries a 3-years-from-the-return limb, whichever is later, but that one applies only where a return governs the amount
Request already refused once	The Independent Office of Appeals, which takes international penalties on a prepayment, post-assessment basis	The deadline stated in your rejection letter, which the IRS tells you to refer to; the published general figure is 30 days from the date of that letter
Appeals refused, or you want a court	A refund suit in US district court or the US Court of Claims, which the Taxpayer Advocate names as the alternative to Appeals	No suit before 6 months from filing the claim unless the IRS decides sooner, and none more than 2 years after a mailed notice of disallowance (IRC 6532)

Interest is worth understanding before you decide. The IRS charges it on penalties and says it “cannot remove or reduce interest unless the penalty is removed or reduced”, so paying stops the interest growing while a refund claim runs, and not paying keeps the money in your hands while the balance grows. That’s a genuine trade, and it turns on your own numbers and your own tolerance rather than on any rule. Nobody can make that call for you from a web page.

What should I do next?

Start with the notice before you start on the argument. Photograph it, diary the deadline printed on it, and note which Internal Revenue Code section it names, because the Instructions for Form 843 tell you that section is on the notice and it decides which rules apply. Then confirm every open year’s Form 3520 and substitute Form 3520-A are actually filed, since the manual puts that step ahead of any reasonable-cause review. Only then write the explanation.

• If FBARs are also missing, that’s a different statute with its own standard and its own procedure, covered in whether late FBARs need Streamlined.
• If US returns are missing too, the penalty is the smaller problem and the never-filed catch-up route comes first.
• If you’re deciding about next year rather than last year, what TFSA reporting actually costs prices the choice.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.