A gift from your parents can be free of U.S. income tax and still carry a reporting penalty of up to 25% if the required form is missed. For an American living in Israel, that can turn help with an apartment purchase into a very expensive paperwork problem.

The recent Fuentes case brings that risk into focus. It also has an unsettling twist. The IRS refunded money and cancelled assessments, but the government's claims survived. Understanding why matters both before receiving a large gift and when trying to resolve a penalty.

The key points for Americans in Israel

  • Discuss large gifts and inheritances with your U.S. tax adviser, even when no income tax seems due.
  • Check donor status, related-donor aggregation and whether the transfer comes from an individual, estate, company or trust.
  • Keep proof of the gift, its dollar value and the separate Form 3520 filing. Check FBAR and Form 8938 obligations as well.

What happened in the Fuentes case

The September 4, 2026 opinion from the U.S. District Court for the District of Columbia describes Antonio Cesar Fuentes as a U.S. citizen who had always lived in Mexico. He said he received substantial monthly gifts from his father, disclosed them to an attorney and tax specialist in El Paso, and relied on that adviser to prepare his U.S. filings. Forms 3520 were omitted for 2010, 2011, 2012 and 2015.

The IRS assessed a $90,000 penalty for 2010. Fuentes paid it with interest, pursued a refund and eventually sued. During the litigation, the IRS abated liabilities, issued refunds and released liens. From a taxpayer's perspective, those developments would understandably look like a resolution.

The problem was that the relevant liabilities had already been referred to the Department of Justice. The court held that the IRS abatements, made without DOJ authorization, had no legal effect. Fuentes could withdraw his own refund complaint, but the government's counterclaims continued.

This was not a final judgment that Fuentes owed the penalties. The court also did not decide whether his reliance on professional advice established reasonable cause. Instead, it sent the government's counterclaims to the Western District of Texas, where his adviser is located, and that is where the reasonable cause question is expected to be litigated. As of this writing, no decision on the merits has been reported.

The practical lesson is particularly important if you are receiving gifts from non-U.S. family members.

Why the same reporting issue arises in Israel

U.S. citizens remain U.S. persons for these rules while living in Israel. A genuine gift or inheritance is generally excluded from the recipient's U.S. gross income under section 102. Form 3520 addresses a separate question about whether a receipt from a foreign person must be reported.

For gifts from a nonresident alien individual or bequests from a foreign estate, Part IV reporting generally applies when the annual total exceeds $100,000. An Israeli parent who is also a U.S. citizen does not become a foreign donor because the family lives here. Conversely, a gift from a genuinely non-U.S. parent can require reporting for the U.S. child.

An apartment gift makes the rule concrete

Consider a hypothetical American in Israel whose parents help with an apartment. Her mother gives her $70,000 and her father gives her $50,000 during the same year. Assume both parents are non-U.S. individuals and the payments are genuine gifts. Because the donors are related, the relevant total is $120,000. Neither gift exceeds $100,000 on its own, but together they trigger the reporting requirement.

If she doesn't report the gifts on a timely Form 3520, she faces a hefty penalty. The penalty is 5% of the reportable gift for each month the failure continues, up to 25%, subject to the reasonable-cause exception. In this example, the maximum would be $30,000. It is calculated on the $120,000 reportable amount, rather than only the $20,000 above the threshold. No income tax on the gift, but a very heavy reporting penalty.

What to do if a form was missed

Get advice on correcting the filing and documenting the circumstances promptly. In October 2024, the National Taxpayer Advocate announced that the IRS had stopped automatically assessing penalties when late Part IV foreign-gift forms were filed. That is a welcome administrative change. It does not repeal the penalty or guarantee relief for an existing assessment.

Form 3520 is filed separately from your income tax return. Calendar-year filers generally face an April 15 deadline, with June 15 treatment for qualifying overseas filers who attach the required statement. A valid income tax extension can generally extend Form 3520 to October 15. Check the applicable year, eligibility and any special relief rather than assuming every income tax extension carries over.

Family support can make building a life in Israel easier. Getting the U.S. reporting right helps preserve that benefit. Fuentes is a reminder to ask about the form early and verify the legal outcome if a dispute develops.

If you are expecting a large gift or inheritance from family abroad, or think a Form 3520 may have been missed, reach out and we can take a look.

This article provides general information, not personalized tax or legal advice. Your facts matter, and Israeli tax and banking requirements need their own review.