Form 3520 Penalties, ERC Interest, and Conservation Easements: Three Federal Tax Lessons

Fusion Legal & Tax · August 26, 2026Practice area8 min readTax Resolution

Federal tax disputes often begin with a reasonable human assumption: I disclosed the transaction somewhere. I followed what an IRS representative told me. I have documents showing the property’s value.

But tax controversies are usually decided through narrower questions: What did the statute require? Which form was due? What evidence supports the position? Did the taxpayer request a remedy the court is authorized to provide?

Three recently discussed federal cases—Ziyue Zhang v. Internal Revenue Service, Matto v. Commissioner, and Savannah Shoals, LLC v. Commissioner—bring those questions into focus. Although they concern very different transactions, they point toward the same protective approach: build the record before a dispute begins, and match the response to the exact procedural path available.

1. Form 3520 penalties: “reasonable cause” needs a factual record

The Zhang dispute concerns a penalty associated with Form 3520, the information return used for certain transactions involving foreign trusts and certain foreign gifts.

The statutory provision at issue, IRC § 6039F(c)(2), provides a “reasonable cause” exception. That language matters, but invoking it is not the same as establishing it. A taxpayer generally needs a coherent, documented explanation showing what happened, what steps were taken, who provided guidance, and why the reporting failure occurred.

Ignorance of a filing requirement, standing alone, is a fragile foundation. A stronger administrative record may include:

The date and amount of each transfer;
Bank statements and transfer records;
The identity and relationship of the sender;
Communications explaining whether the funds were a gift, loan, trust distribution, or payment;
Copies of the original federal return and every international information return filed with it;
Written advice received from a CPA, attorney, enrolled agent, bank, or other adviser;
Engagement letters showing what information the taxpayer provided and what work the adviser agreed to perform;
IRS notices, response deadlines, certified-mail receipts, and proof of electronic submissions; and
A timeline explaining when the taxpayer first learned of the reporting issue and what happened next.

The goal is not to produce more paper for its own sake. It is to help the IRS—or, if necessary, a court—understand the taxpayer’s actions without having to fill gaps with assumptions.

Judicial review is its own procedural question

When the IRS assesses a penalty and denies administrative relief, the next step is not automatically “appeal the decision in court.” The available path can depend on what was assessed, whether it was paid, what type of claim was submitted, when notices were issued, and which court is being asked to hear the dispute.

That distinction is important because the strength of a reasonable-cause explanation and the court’s authority to hear a particular challenge are separate issues. A taxpayer may have substantial facts supporting relief but still face a procedural barrier if the wrong remedy, forum, or filing sequence is used.

If a Form 3520 notice arrives, preserve the envelope and notice date, calendar every response deadline, and obtain the complete filing history before sending a broad narrative response. A carefully organized submission can protect both the administrative request and any later review options.

The Employee Retention Credit created difficult timing questions for employers that claimed the credit and later amended income tax returns to reflect its effect. In Matto v. Commissioner, the Tax Court addressed a request to abate underpayment interest under IRC § 6404(e)(1) and the taxpayer’s reliance on erroneous oral guidance from IRS personnel.

The practical lesson is narrow but important: interest abatement is not a general fairness remedy. A taxpayer should identify the precise statutory basis for abatement and connect each period of claimed delay to evidence supporting that basis.

That means an effective review should distinguish among:

The date the original return was due and filed;
The date the ERC claim was submitted;
The date the IRS processed or paid the credit;
The date an amended income tax return became necessary;
The date additional tax was assessed or paid; and
Any identifiable period for which abatement is requested.

Without that chronology, the dispute can collapse into a general argument that charging interest feels inconsistent because the credit itself was delayed. That concern may be understandable, but a court still must apply the remedy Congress authorized.

Treat telephone guidance as a lead, not the final answer

Matto also underscores the limitations of relying on erroneous oral advice from IRS personnel. When an IRS representative gives instructions by telephone, write down:

The date and time of the call;
The number called;
The representative’s name and identification number, if provided;
The exact question asked;
The answer given;
Any forms, notices, or Internal Revenue Manual provisions mentioned; and
The promised follow-up date or processing period.

Then confirm the answer against applicable written authority before making a consequential filing or payment decision. A call log can help establish what occurred, but it should not be treated as a substitute for analyzing the governing rule.

Administrative capacity can also affect how quickly taxpayers receive help. An April 9, 2026 report concerning the filing season reported a 27% decline in IRS staffing during the preceding year and described resulting pressure on taxpayer assistance and enforcement functions. That does not change a taxpayer’s legal obligations, but it reinforces the value of written confirmations, complete submissions, and careful follow-up records.

3. Conservation easements: the transaction must survive an evidence review

Savannah Shoals, LLC v. Commissioner concerns a conservation easement deduction—an area in which statutory requirements, transaction documents, expert valuation, and trial evidence intersect.

For property owners and advisers, the protective lesson is that an appraisal figure cannot be evaluated in isolation. A conservation easement file may need to tell the full story of the property and transaction, including:

Ownership and entity records;
Acquisition documents and purchase price;
The property’s condition and permitted uses before the donation;
The easement deed and any related agreements;
Mortgages, lender consents, and subordination documents;
Zoning, access, environmental, and development restrictions;
Comparable-sale information;
Appraisal assumptions and supporting data;
Contemporaneous acknowledgment and tax-return attachments; and
Communications among the owner, appraiser, attorney, land trust, and return preparer.

A deduction can face separate challenges involving legal eligibility, required documentation, valuation, and evidentiary support. Satisfying one part does not necessarily resolve the others.

The IRS’s scrutiny of conservation easements also remains a developing area. The Journal of Accountancy’s tax coverage has reported that the IRS ended its latest conservation-easement settlement initiative and was creating a new office to coordinate strategy for those cases. Because that page is a continuing tax-news resource, readers should verify the publication date and underlying IRS material before treating any headline as current guidance.

The shared lesson: procedure is part of the tax position

These disputes involve different code sections and different kinds of taxpayers, but they reveal four common pressure points.

1. Filing the income tax return may not complete the reporting

Foreign gifts, foreign trusts, business credits, partnerships, charitable contributions, retirement arrangements, and other transactions may create separate reporting requirements. A transaction-level checklist is often more protective than reviewing only the face of Form 1040 or a business return.

2. A persuasive explanation needs supporting evidence

“Reasonable cause,” reliance on a professional, agency delay, and valuation are not magic phrases. Each depends on facts, dates, documents, and the legal standard governing the requested relief.

3. Administrative relief and judicial review are different stages

A protest submitted to the IRS should be prepared with later review in mind, but a lawsuit cannot simply repeat the protest. The taxpayer must also identify the court’s authority, the available cause of action, payment prerequisites, and applicable filing deadline.

4. Written guidance is safer than memory

When a position affects a substantial deduction, international-information return, amended return, or penalty exposure, preserve written advice and the documents given to the adviser. Oral guidance can help identify the next question; it should rarely be the entire foundation for a filing decision.

A practical federal tax controversy checklist

If you receive a notice involving one of these issues, consider taking the following steps before responding:

Save the complete notice and envelope. The notice date, mailing date, tax period, and response deadline may all matter.
Request the full file. Gather the original return, amended returns, information returns, elections, appraisals, correspondence, and proof of filing.
Build one master timeline. Include transactions, filings, IRS calls, notices, payments, refund claims, and adviser communications.
Separate the issues. Tax, penalties, and interest may involve different standards and remedies.
Identify the requested relief. State exactly what should be removed, adjusted, refunded, or reconsidered—and why the cited authority permits that result.
Confirm procedural deadlines independently. Do not assume that an informal conversation, pending correspondence, or reconsideration request suspends a statutory deadline.
Keep the response factual. A warm, honest explanation can be powerful, but it should remain consistent with bank records, filed returns, contracts, and prior statements.
Review the broader financial picture. Correcting one return may affect another year, another entity, basis calculations, deductions, or information reporting.

Federal tax law continues to shift. The AICPA’s tax-change planning library offers a general collection of practitioner resources, while Current Federal Tax Developments tracks technical developments for tax professionals. These are useful monitoring tools, but any decision about an active notice should be based on the specific statute, guidance, court opinion, and deadlines applicable to that matter.

Protect the record before the deadline controls the outcome

A Form 3520 penalty, ERC-related interest assessment, or conservation easement examination can feel like the IRS is ignoring the larger story. The most constructive response is to make that story verifiable: organize the dates, preserve the documents, identify the exact legal standard, and choose the proper procedural route.

Fusion Legal & Tax helps clients understand the full financial and legal picture surrounding complex tax filings and IRS disputes. An early review cannot promise a particular result, but it can help clarify the available options, protect important deadlines, and ensure that the response is built on evidence rather than guesswork.

This article provides general educational information, not legal or tax advice for any particular person or transaction. Tax outcomes and procedural options depend on the governing law, the documents, the tax period, and the facts of each matter.