Form 3520 Penalty Abatement

Form 3520 Penalty Abatement

Form 3520 Penalties and Abatement

Form 3520 Penalty Abatement for Late Filing: When a U.S. Person receives a gift, inheritance or trust distribution from a foreign person — they may be subject to Form 3520 reporting. If the recipient of the gift does not file the form timely, they may be subject to a Form 3520 late filed penalty — which can reach into the hundreds of thousands — or even millions — of dollars. In general, the Form 3520 is due when a Taxpayer’s tax return is due. In recent years, the IRS has increased enforcement of foreign accounts compliance, along with unreported foreign income and undisclosed foreign gifts. The average amount of the offshore penalty that the Internal Revenue Service has been issuing on Form 3520 is upwards of 25% value of the gift. Depending on the specific taxpayer situation, that can be a very significant penalty. To avoid or abate these penalties, the IRS has developed abatement procedures, including Reasonable Cause, Delinquency Procedures, and offshore voluntary disclosure such as new  OVDP or Streamlined Filing.

Form 3520 Foreign Gift Penalty

In most unreported gifts situations, a U.S. person receives a money gift or an inheritance from a foreign parent or relative (or a trust distribution) — and had no idea they were supposed to report the information to the IRS. It makes sense that the US Person would be unaware of any reporting requirement, since most gifts from a Foreign National (Nonresident Alien) to a US Person is not taxed — and amounts to nothing more than a gift from their parents or other relatives. But, when the gift from a foreign person is a “large” gift — then the Form 3520 reporting requirements kick in. And, if a person does not file form 3520, there can be some significant penalties associated with the non-filing of the form in accordance with IRC 6677.

In lieu of an audit, the IRS may issue a CP15 Notice with an automatic penalty assessment.

IRC Section 6677

      • “A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause).

        • Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable): 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust. 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution.

        • 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information.

        • Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c) and the Instructions for Form 3520-A.

        • Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.”

Form 3520 Penalty Abatement for Late Filing

You may be able to reduce fines or penalties with a Form 3520 appeal and/or reasonable cause statement. A Reasonable Cause submission is a very complex and delicate undertaking, There is no “form” for the submission, and you need to rely on the experience of your Tax Attorney.  Each person’s facts and circumstances are different, and reasonable cause is evaluated differently depending on who is reviewing the reasonable cause statement at the IRS.  

As provided by the IRS:

      • “No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.”

We have successfully represented hundreds of clients with Reasonable Cause submissions for Form 3520.

Reasonable Cause Limitation

      • “The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause.

      • Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause. See section 6677(d) for additional information.”

 CDP 12153 & Form 3520 Penalty Abatement

Sometimes, the Taxpayer has no choice but to take the IRS to task. If the Taxpayer is considering litigation, the first stop is a CDP 12153 request. The Collection Due Process hearing is typically only available at the end-game stage of a tax enforcement matter such as notice of federal lien or intent to levy. The Collection Due Process hearing and requests must be made timely within 30 days of the final notice. As long as it is made timely then the taxpayer has the option of Tax Court available.

In addition, the taxpayer can dispute the underlying collection enforcement by showing reasonable cause. This is generally not available when using a CAP.

As provided on Form 12153:

      • “I do not believe I should be responsible for penalties.” The IRS Independent Office of Appeals may remove all or part of the penalties if you have a reasonable cause for not paying or not filing on time.

      • See Notice 746, Information About Your Notice, Penalty and Interest for what is reasonable cause for removing penalties.”

The main concern with the Collection Due Process hearing for most taxpayers is they have to wait until the very end of enforcement before they can seek to use this process. Especially with the delay in the mail system due to COVID-19 — and many agents working from home and only intermittently checking their mail– there is the concern that the delay in the IRS receiving and processing the collection due process request may result in an unintentional levy or lien being placed on their accounts or property.

While the taxpayer should presumably be able to get it removed, just having it ever show up on their record can be a very big deterrent for many taxpayers to wait until the CDP is allowed — versus taking the Collection Appeal Process route.

If a person misses the time to file a Collection Due Process hearing, they may still be able to request it — but they do not get the opportunity to go to Tax Court if it doesn’t go their way — this is referred to as an equivalent hearing.

IRC 6751 Procedural Requirements & 3520 Penalty 

When a Taxpayer gets a CP15 Notice, the path of least resistance for the Taxpayer is most often to respond to the letter in order to set the stage for a reasonable cause penalty abatement argument. Instead of going this route, some less experienced attorneys recommend to their clients to let the CP15 Notice lapse — file an (expensive) lawsuit and pin their hopes and dreams on a penalty abatement using Internal Revenue Code Section 6751 — which is neither specifically tailored for Form 3520 assessable penalties nor even applicable when the penalty is electronically assessed and meets the requirements of 6751(a) — which is commonplace for most 3520 penalties. In general, showing Reasonable Cause from the outset is the most effective method for abating Form 3520 penalties and/or setting the Taxpayer on the right path to eliminate or reduce 3520 penalties at a later stage if necessary. It should be noted that Taxpayers can still make a FOIA request re IRC 6751, while still proving Reasonable Cause — they are not mutually exclusive of one another — but the timing of the FOIA request must also be considered.

It is important to make sure the taxpayer timely responds to the CP15 notice.  If the taxpayer is going to let the time run out and go an alternative route based on a 6751 procedural issue, it is important that they have a firm strategy from the attorney with an understanding of the different steps and what other options for penalty mitigation they are giving up in the process – and full knowledge of the costs to litigate from the outset.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm today for assistance.

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