IRS Form 3520-A Penalty
This Internal Revenue Service form is used to report ownership of a foreign trust. If the trustee does not file the form, then the members of the Trust may be liable for offshore penalties – and the penalties can be severe.
One of the biggest problems with the Form 3520-A is the misconception of what a foreign trust is. A Foreign trust encompasses more than just your basic revocable trust.
For example, technically, your foreign Pension is a trust. The employer, trustee, and you (beneficiary) comprise the trust members.
Oftentimes, clients will contact us after receiving an IRS CP 15 Notice after filing a late Form 3520-A without using an experienced attorney and a submitting a comprehensive and detailed Reasonable Cause Statement package.
What is the Form 3520-A Penalty?
In order to understand why timely reporting of foreign trusts is important, it is crucial to understand just how high the Form 3520-A penalty can be for not properly reporting them.
As provided by the Form 3520-A instructions:
The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year 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).
If a foreign trust fails to file a Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for Form 3520-A) in order to avoid being subject to a penalty for the foreign trust’s failure to file a Form 3520-A.
For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as April 15 for the U.S. owners who are individuals) is considered timely filed.
The U.S. owner is subject to an additional separate penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year if the U.S. owner (a) fails to file a timely Form 3520 (Part II), or (b) fails to 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.
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. If the IRS can determine the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year, then the additional penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross value of the trust. For more information, see section 6677.
Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.”
Summarizing IRS Form 3520-A Penalty
The Form 3520-A penalty reads like a freight train on the loose.
First, the owner of the trust is subject to a $10,000 penalty or 5% value attributed to the U.S. owner. Then, if the 3520-A is not filed appropriately and completely, another $10,000 penalty or 5% value penalty is tacked on.
Further, the IRS can continue to tack on 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.
And, there are even more potential penalties:
“If a U.S. owner of a foreign trust is subject to a penalty imposed under section 6662 for an underpayment of tax required to be shown on a return, then such penalty may be increased under section 6662(j) for any portion of an underpayment which is attributable to any transaction involving any asset with respect to which information was required to be provided on Form 3520-A. For more information about undisclosed foreign financial asset understatements, see section 6662(j).
Form 3520-A Reasonable Cause
The IRS does have a process to try to reduce or avoid the Form 3520-A penalty(s) with Reasonable Cause:
“No penalties will be imposed if the taxpayer can demonstrate that the failure to comply with the reporting requirements was due to reasonable cause and not willful neglect.”
Proving reasonable cause to the IRS requires a detailed and comprehensive submission. It is usually never as simply as just submitting a ½ page letter to the IRS, asking for forgiveness. Rather, it is a detailed submission to the IRS.
Alternatively, if a person has already been issued a penalty, may qualify for delinquency procedures or the streamlined procedures, unless they cannot certify under penalty that they were non-willful — and would instead submit to Voluntary Disclosure.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Dually Licensed as an EA (Enrolled Agent) or CPA
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