Risk of Form 3520 Collection Due Process Hearing
Risk of CDP in Form 3520 Penalty Dispute Matters: When a Taxpayer receives an IRS CP15 notice regarding a Form 3520 penalty — usually for receiving a large gift from a foreign person — they have limited opportunities to pursue a penalty abatement. Some inexperienced tax lawyers are all too quick to push the Collection Due Process Hearing (Form 12153) avenue as the only means to pursue a 3520 penalty abatement — but this (irresponsibly) fails to take into consideration the negative implications of waiting to pursue a Collection Due Process Hearing (CDP). For example, while waiting for the CDP to become ripe, the Taxpayer will become subject to serious collection activities, such as a Notice of Federal Tax Lien or Bank Levy. Let’s review the potential downside of waiting to pursue a Collection Due Process Hearing for a Form 3520 Penalty.
Collection Due Process Hearings
By way of brief background, when the Form 3520 penalty is received, it is usually on a CP15 Notice. When the Taxpayer receives a CP15 Notice, the Taxpayer has the opportunity to present a reasonable cause statement to the IRS in order to abate or remove the penalty. If the Taxpayer is not successful — they have the right to appeal. But at the time of the appeal – if the IRS does not abate the penalty and the Taxpayer later wants to pursue a CDP — the IRS can take the position that by pursuing the appeal, the Taxpayer has already lost the opportunity to go to a Collection Due Process Hearing at a later time — this may also eliminate some of the potential avenues available if the Taxpayer wants to go to tax court. But, waiting for a Collection Due Process Hearing to be ripe can also cause other significant complications for the Taxpayer.
CDP is an End-Game Opportunity
The benefits of a Collection Due Process hearing is that it permits the Taxpayer to essentially get two bites of the apple — and it opens the door to go to Tax Court on multiple different arguments. But, the Taxpayer usually has to wait until they receive a Notice of Federal Tax Lien or Intent to Levy before they can pursue a CDP. To the inexperienced international tax attorney — these are just hurdles the Taxpayer must overcome in order to get to the Collection Due Process Hearing stage.
But, to the people involved — these are real concerns that impact their day-to-day life.
Notice of Federal Tax Lien
Imagine the situation in which a person plans on selling their home or applying for a line of credit — and then they receive a Form 3520 penalty notice. Some aggressive tax attorney convinces them to wait until the Collection Due Process Hearing instead of pursuing an appeal — without properly explaining to them the pros and cons of that strategy — and that the CDP is not ripe until Taxpayer receives a Notice of Federal Tax Lien or Intent to Levy. If the Taxpayer is in escrow for example and a Notice of Federal Tax Lien hits — and the buyer does not want to deal with the hassle — the Buyer can just walk away (which is their right to do in California unless all contingencies have been removed).
Was waiting for the CDP worth it?
The NTFL may also impact their employment, ability to obtain credit or a HELOC, etc.
Wrongful Bank Levy
There is probably not a single person alive who would describe the IRS as a well-oiled machine. Several times throughout our many years of tax practice, we have been contacted by Taxpayers who were hit with a wrongful/premature levy. This can occur in a situation in which the Collection Due Process Hearing request is not processed in time before the levy was issued. Moreover, removing the wrongful levy can take a very long time — all the while the Taxpayer has lost out on the ability to access those funds — which may severely impact their day-to-day life.
Interest Continues to Accrue
It can take several months — if not years — for the Taxpayer receive the final notice sufficient to pursue a CDP. Still, interest continues to accrue all the while — and if the Taxpayer is not successful at the Collection Due Process Hearing or at Tax Court — they could be in for a significantly increased fine based on the accrued interest — in addition to the Form 3520 penalty.
Be Careful of Inexperienced Form 3520 Counsel
It is important to understand all the different avenues — and the pros and cons of each approach — when seeking to have a Form 3520 penalty removed or abated. It is important for a Taxpayer to get a baseline understanding of what their options are before they pursue a specific strategy — and not be fear-mongered into taking one specific path.
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