A federal judge has ruled that the IRS has the statutory authority to assess penalties for failing to report large foreign gifts, but allowed a taxpayer’s challenge to proceed on other grounds.
Zhang v. Internal Revenue Service et al. , No. 24-cv-8210, 2026 WL 1210079 (N.D. Cal. May 4, 2026).
The U.S. District Court for the Northern District of California on May 4 dismissed Jinming Zhang’s claims that the IRS lacks the power to assess penalties under IRC § 6039F, and that the penalty violated the Administrative Procedure Act and the Eighth Amendment’s Excessive Fines Clause.
However, U.S. District Judge Araceli Martínez-Olguín determined that Zhang’s claims for a refund based on a reasonable-cause defense and an alleged failure by the IRS to get required managerial approval for the penalty can move forward.
Background
The case centers on Zhang, a Chinese citizen who became a U.S. resident for tax purposes in mid-December 2017 after passing the “substantial presence test,” according to the opinion.
In 2017, Zhang received $287,108 in wedding gifts from her family in China. She timely filed her 2017 income tax return using TurboTax but did not include Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, the opinion says. Zhang learned of the filing requirement in 2018 and submitted a late Form 3520 in October of that year. In November 2020, the IRS assessed a penalty of $71,777, the maximum 25% penalty allowed under § 6039F.
Zhang’s representative sent a letter to the IRS requesting an abatement of the penalty, arguing for reasonable cause. The IRS rejected the request, stating she did not “establish reasonable cause or show due diligence,” according to court documents.
Zhang appealed to the IRS Independent Office of Appeals, which in 2022 reduced the penalty by 20% to $57,422. Zhang paid the reduced penalty in April 2024 and filed a claim for a refund, which led to the current lawsuit after the IRS did not act on the claim within six months.
Penalty Assessable
Judge Martínez-Olguín rejected Zhang’s central argument that the IRS can only collect the § 6039F penalty through a civil lawsuit, not through its administrative assessment and collection powers.
Zhang had argued that because § 6039F is not explicitly labeled an “assessable penalty,” the IRS lacks authority to assess it. The argument mirrors one raised in Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024), where the D.C. Circuit reversed the Tax Court and held that a similar foreign-reporting penalty was assessable by implication.
The district court determined that the language of § 6039F plainly gives the IRS assessment authority. The statute says the penalty shall be paid “upon notice and demand by the Secretary and in the same manner as tax.” This “notice-and-demand” language refers to the standard procedure that accompanies an IRS assessment and is “closely tied to assessments,” Judge Martínez-Olguín wrote.
Furthermore, the instruction to collect the penalty “in the same manner as tax” contrasts it with the default mode of penalty collection via civil action, the opinion says. The court also reasoned that the statute’s inclusion of a “reasonable cause” defense, which is evaluated by the IRS, shows that Congress intended for an administrative assessment process.
“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,” Judge Martínez-Olguín wrote. “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.'”
Other Claims Dismissed
The district court also dismissed Zhang’s claims under the Administrative Procedure Act, ruling that she has another adequate remedy in court. A plaintiff can only bring an APA claim when “there is no other adequate remedy in a court,” the opinion says.
Because Zhang’s tax-refund suit allows her to challenge the penalty and ultimately obtain a refund, it provides “relief of the same genre” and precludes a separate APA action, the court concluded. Finally, the court dismissed the Eighth Amendment claim, concluding that the § 6039F penalty is not a “fine” subject to the Excessive Fines Clause.
Citing long-standing Supreme Court precedent, Judge Martínez-Olguín explained that tax penalties are considered remedial, not punitive. They exist as “a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud,” the opinion says, quoting Helvering v. Mitchell, 303 U.S. 391 (1938).
And since the penalty is remedial, it does not constitute a “fine” and does not run afoul of the Eighth Amendment, the district court concluded.
For more on Form 3520 reporting rules for § 6039F purposes, see Checkpoint’s Federal Tax Coordinator 2d ¶ S-3649.1.
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