- 1 Defenses to 3520/3520-A Tax Form Violations
- 2 What is Form 3520 & 3520-A
- 3 What is an Assessable 3520/3520-A Penalty?
- 4 Preemptive Defense to Form 3520/3520-A Noncompliance with Offshore Disclosure/Amnesty
- 5 Reasonable Cause Defense to Form 3520/3520-A Violations
- 6 Appeal Rights/Collection Due Process
- 7 CDP to Tax Court
- 8 Pay the Bill & Sue in Federal Court
- 9 All Hope is Not Lost
- 10 About Our International Tax Law Firm
Defenses to 3520/3520-A Tax Form Violations
Defense to 3520/3520-A Form Noncompliance in Layman’s Terms: When it comes international tax, foreign gift and trust reporting is unnecessarily complicated. And, as if international tax law is not complicated enough — these days it seems like the internet is riddled with offshore disclosure fodder written by self-proclaimed world renowned tax experts on FBAR, FATCA, 5471 etc — who leave Taxpayers in an (unnecessary) state of fear and duress once they reach out to our firm. When it comes to the various IRS international information reporting forms, it is true that the Forms 3520 (Gifts and Trusts) and 3520-A (Trusts) are complicated and the penalties can be tough — but the penalties can oftentimes be defended and abated. Similar to other international information reporting forms, such as Internal Revenue Service Forms 5472 and 8865 — the 3520/3520-A noncompliance penalties are not based on any specific amount of tax due to the IRS. In fact, oftentimes the Taxpayer will have no income tax liability whatsoever — and has not missed any income reporting on their U.S. tax return. Instead, they were simply unaware of a reporting requirement and may have been dinged with what is referred to as an “assessable penalty” — which means the penalty is assessed without the opportunity to dispute the penalty beforehand — such as when tax penalties stem from an audit. Let’s review some important tax tips about defenses to 3520/3520-A Tax Form noncompliance:
What is Form 3520 & 3520-A
Form 3520 is an international information reporting form used by US Persons to report a gift or trust distribution from a foreign person or foreign trust. Form 3520-A is an international information reporting form used by US Persons to report foreign trust ownership.
What is an Assessable 3520/3520-A Penalty?
A penalty that was issued without the Taxpayer having prior notice or an opportunity to avoid before issuance of the penalty.
Preemptive Defense to Form 3520/3520-A Noncompliance with Offshore Disclosure/Amnesty
If a Taxpayer learns that they are out of compliance, then before they are penalized — they may have the opportunity to avoid the penalty by submitting to one of the offshore voluntary disclosure program packages. The Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Reasonable Cause Defense to Form 3520/3520-A Violations
If the taxpayer has already been issued a Form 3520/3520-A penalty and receives a CP15 Notice, they may want to consider submitting a reasonable cause protest letter — detailing facts and circumstances sufficient to prove that they acted with reasonable cause and not willful neglect. If the Taxpayer is successful, then the IRS will abate (remove) the penalty. If not, then typically it authorizes the taxpayer to pursue an appeal.
Appeal Rights/Collection Due Process
Depending on whether the Taxpayer wants the entire matter to be decided by the IRS Office of Appeals (which for all intents and purposes is binding on both parties), or prefers a more detailed comprehensive Collection Due Process Hearing in which the Taxpayer has more options to pursue Tax Court — will determine whether taxpayer wants to pursue an appeal after the protest is rejected — or later in the process by way of a Collection Due Process Hearing.
CDP to Tax Court
If the taxpayer chooses the Collection Due Process and is further denied relief, then they can take the matter over to Tax Court for further litigation. Otherwise, if they did not pursue a Collection Due Process Hearing, they will have limited opportunity to move the case forward with the IRS.
Pay the Bill & Sue in Federal Court
The Taxpayer has another alternative, which is to simply pay the bill and then make a request a refund. If the refund is denied at the IRS level — then the taxpayer can pursue the matter and litigate it in federal court (usually a 2-year SOL). Whether or not the Taxpayer has to actually pay the full penalty upfront in accordance with the Flora Rule may be up for debate — based on a recent ruling involving Flora and the FBAR.
All Hope is Not Lost
Whether the taxpayer learns that they missed the filing and wants to proactively avoid the penalty or was already hit with a penalty and seeks to abate it — taxpayers have various options available to them to minimize or avoid penalties. You should speak with a Board-Certified Tax Lawyer Specialist licensed in the State they operate their firm from.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and defense to 3520/3520-A violations.
Contact our firm for assistance.