The Penalties for Foreign Trust (IRS Form 3520-A), Avoid Fines

How IRS Form 3520-A Penalty, Abatement & Relief Works

What You Must Know About Penalties for Form 3520-A

When it comes to IRS international information reporting, one of the most complicated forms that some U.S. taxpayers may have to file on an annual basis is Internal Revenue Service Form 3520-A. Specifically, Form 3520-A is required for U.S. Taxpayers who have ownership of a foreign trust (aka Annual Information Return of Foreign Trust With a U.S. Owner) in accordance with Internal Revenue Code section 6048(b). And, taxpayers who do not timely file the form (or who file an incomplete form), may become subject to various fines and penalties. In recent years, the IRS has significantly increased the assessment and enforcement of penalties against U.S. persons who have ownership of foreign trusts. To alleviate some of these penalties for failing to file Form 3520 or 3520-A, the Treasury Department also recently proposed various regulations that may help some taxpayers, in certain situations, avoid Form 3520-A Penalties.

Let’s review 5 key things taxpayers should know about IRS form 3520-A penalties.

Standard Form 3520-A Penalties

When taxpayers are penalized for failing to file form 3520-A it is based on a percentage value of the trust and/or $10,000, whichever is greater. Therefore, even if the trust is of low value, the taxpayer could potentially get hit with a $10,000 penalty.

As provided by the IRS:

• • • “The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of 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 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).”

Continuing Form 3520-A Penalty

In addition to the initial penalties that the IRS can issue, there are ‘continuing noncompliance’ penalties for taxpayers who do not resolve the issue within 90 days of receiving the failure to comply notice from the IRS.

As provided by the IRS:

• • • “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 penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross value of the trust.”

Potential Criminal Penalties

The IRS also reserves the right to recommend criminal penalties if they believe the taxpayer may have filed a false return — or intentionally failed to file the form. The chance of the IRS pursuing criminal penalties is small, but it is important to note that the IRS does explicitly reserve that right and refers to it in the instructions for form 3520-A:

As provided by the IRS:

• • • “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.”

Reasonable Cause May Abate/Avoid Form 3520-A Penalties

As with most international information reporting penalties, even if the IRS is inclined to issue penalties — or has already issued penalties against the taxpayer –the taxpayer may be able to avoid or abate penalties by proving reasonable cause. The specific verbiage is that the taxpayer must show that the non-compliance was due to reasonable cause and not willful neglect. We have separate resources to assist you with understanding how the reasonable cause process works.

As provided by the IRS:

• • • “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.”

Late Filing Form 3520-A Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520-A and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.