Key takeaways

This is a major win for taxpayers, as it reduces the burden significantly for a taxpayer who wishes to correct the prior failure to file this information reporting form where the previous omission was not intentional. It also highlights the need going forward for US taxpayers and their representatives to provide well-argued and documented reasonable cause statements.

Foreign gifts and bequests

Form 3520 has four sections — three relating to foreign trusts and one relating to the receipt of foreign gifts and bequests. Generally, US Persons who receive gifts or bequests from non-US Persons exceeding USD 100,000 must file Form 3520 to report their receipt of such gift or bequest. This is an information only filing requirement as gifts and bequests are excluded from income for US Persons. However, a US Person's failure to report the receipt of such gift or bequest may subject the US Person to significant penalties. Section 6039F(c)(1) imposes a penalty of 5% on the amount of such foreign gift or bequest for each month there is a failure to file Form 3520, with the aggregate amount of the penalties capped at 25% of the amount of the gift or bequest. Under the prior policy, the IRS had the option to automatically assess penalties on these late filed Forms 3520 reporting the receipt of a foreign gift or bequest. However, with the announcement, the IRS will now only assess penalties after considering the reasonable cause statement, or any other information provided by the taxpayer, attached to the Form 3520.

Foreign trust reporting

Furthermore, the IRS also announced a similar change in policy with respect to the foreign trust reporting sections of Form 3520. Similar to the receipt of a foreign gift or bequest, a US taxpayer must report certain reportable events relating to foreign trusts on Forms 3520 and 3520-A and the failure to do so can result in significant penalties. Section 6677(b) imposes a penalty on the greater of USD 10,000 or 5% of the gross reportable amount for failure to file Form 3520-A and Form 3520 for the relevant year regarding a foreign trust. Furthermore, the IRS imposes additional penalties of USD 10,000 for each 30-day period Form 3520-A and Form 3520 is not filed after having received notice from the IRS of such failure to file. The aggregate amount of penalties imposed is capped at the gross reportable amount. As noted above, under the prior policy, the IRS had the option to automatically assess penalties without considering a taxpayer's reasonable cause statement or other information attached to the filing. However, the IRS has also agreed here to first consider the information submitted by the taxpayer before imposing penalties for the failure to file Forms 3520 or 3520-A.

Conclusion

This policy change represents a major victory for US taxpayers and their advocates. For years, both groups have argued that the IRS was systematically and improperly assessing penalties for late-filed Forms 3520 and Forms 3520-A without reviewing the reasonable cause statements that would abate them. The result was US taxpayers were forced to engage in lengthy and expensive processes to challenge the penalty assessments only to have the IRS eventually agree with them and abate the penalties.

Going forward, US taxpayers and their representatives should focus on crafting well-argued and documented reasonable cause statements to late filed Forms 3520 or 3520-A as they should expect the IRS to carefully scrutinize all information submitted.