Importance of Form 3520 Reasonable Cause to Avoid Fines
In years past, the Internal Revenue Service has aggressively enforced automatically assessed penalties against taxpayers who failed to timely file Form 3520. While Form 3520 can be used for several different purposes, the main reason why most individual taxpayers file this form is that they received a large gift or inheritance from a nonresident alien. Recently, the Internal Revenue Service updated the Internal Revenue Manual, with the intent of eliminating the automatically assessed penalty and instead focusing on the reasonable cause statement provided by the taxpayer to determine whether or not a penalty should be assessed at the outset.
Updated IRM (IRM 21.8.2.19.2)
Here is some of the updated language from the IRM:
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“When the taxpayer submits a reasonable cause (RC) statement with the return, Submission Processing (SP) will notate “RC” on Page 1 of the return in the bottom left-hand margin. Also, when Form 3520 is received with a substitute Form 3520-A and a RC statement is attached, SP will separate all three and attach the RC statement to Form 3520, notate “RC” on Page 1 of both Form 3520 and Form 3520-A, edit Action Trails on Form 3520 “D F3520A-TIN-MMDDYY” (the TIN is the TIN from Form 3520-A line 1b, if present), on the RC statement “D F3520A MMDDYY” , and on Form 3520-A “D F3520-TIN-RC-MMDDYY” (the TIN is the TIN from Form 3520 line 1b).
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If “RC” is notated, you must follow the instructions below in paragraph 16 to determine if the taxpayer can demonstrate the failure to comply was due to reasonable cause. If the taxpayer demonstrates reasonable cause, leave a case note on CII documenting, RC established, no penalty assessed, and close the TRNS 223 notice “No Action.”
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The RC statement must be reviewed and approved by a manager prior to closing the TRNS 223 notice. The work leader/manager will add a CII case note documenting approval. If the taxpayer does not demonstrate reasonable cause, assess the penalty following instructions in paragraph 15 below and use a Posting Delay Code of 1 on the adjustment.”
Not a ‘One-Size Fits All’ Approach
There are different approaches a taxpayer can take when it comes to establishing reasonable cause. For context, some taxpayers can establish reasonable cause because they relied on a tax professional who provided bad advice. Other taxpayers may qualify for reasonable cause because they can establish that it was a mistake and that the facts were reasonably sufficient to prove reasonable cause. In other words, just because you prepared and submitted your own Form 3520 does not mean you have established a reasonable cause defense to penalties.
Reliance on Tax Software
Just because a commercially available tax program does not provide Form 3520 is not necessarily an iron-clad defense to Form 3520 penalties. For example, if a taxpayer uses TurboTax to prepare and submit their tax returns but did not file the Form 3520 because TurboTax does not provide the Form 3520 but the taxpayer has no other facts or circumstances in their favor, the mere fact that TurboTax does not offer the form it is typically not sufficient, in and of itself, to establish reasonable cause.
Should You Protest the CP15 Notice?
If a taxpayer receives a CP15 notice that they have already been assessed penalties, then they generally have 30 days to protest the penalty and establish reasonable cause. Some more aggressive, litigious attorneys take the position that taxpayers should not respond at all to the CP15 and instead just wait until they potentially receive a Collection Due Process Hearing notice. The problem with this strategy is that some taxpayers may receive a notice of federal tax lien and not just a levy, and unlike a levy, the IRS does not have to provide a final notice of intent to lien the same way it does a final notice of intent to levy. Taxpayers who are relying on this type of strategy should make sure to discuss the strategy in detail with the attorney they retain.
Late Filing Penalties May Be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
Hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting can be overwhelming for Taxpayers trying to sift through the false information and nonsense they find in online research. Only a handful of attorneys worldwide are Board-Certified Tax Specialists who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.