Section 6039F Penalty Violations of Form 3520 Filing: IRS Overview

Section 6039F Penalty Violations of Form 3520 Filing

Section 6039F Penalty Violations of Form 3520 Filing

Section 6039F Penalty Violations of Form 3520 Filing: When it comes to international reporting penalties, one of the most commonly issued violations is for noncompliance (or late compliance) with Form 3520 filing and reporting. When a US Taxpayer does not properly disclose when they receive a gift from a foreign person — they may be subject to fines and penalties. When it relates to a large foreign gift received from US person, it falls under section 6039F. It is important to keep in mind, that the penalty is not based on any tax liability or failure to file a tax return. Rather, the penalty is solely based on taxpayers’ noncompliance with reporting the gift from a foreign person. Let’s take a quick walk through Internal Revenue Code section 6039F and how the IRS enforces foreign gift reporting non-compliance violations.

Example 6039F Penalty for Form 3520

Here is the most common example of how a Taxpayer gets penalized under section 6039F: Frank is a Lawful Permanent Resident who has foreign relatives living abroad. His relatives are non-US persons, and after Frank graduated from medical school, his grandparents gifted him $1,000,000 so that he could purchase his first home. Frank is unaware that he is required to report this money on Form 3520 — because his cursory Google research revealed that there are no U.S. tax implications for receiving this type of foreign gift. Later down the line, he learns of the reporting requirement, submits a form 3520 and receives a CP15 Notice for $250,000 — the amount represents 25% penalty which is the maximum amount of penalty a taxpayer can get hit with — it reflects five months at 5%. Let’s go through the section 6039F statute:

26 U.S. Code § 6039F – Notice of Large Gifts Received from Foreign Persons

(a) In general

• • • If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.

What does this Mean?

It means that unless the gift is otherwise exempt from reporting, that when a US Person receives a gift from a foreign person — it is reportable when a certain threshold is exceeded. Even though the threshold provides $10,000, the threshold was increased to $100,000 when the gift is from individuals — and $16,649 if it is from foreign entities. 

A few important facts to keep in mind:

• • • reporting is completed on form 3520;

    • reporting the receipt of a gift from a foreign entity is more complicated than from a for an individual; and

    • there is no threshold requirement for foreign trust distributions , which means they all must be reported.

(b) Foreign Gift

• • • For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

What does this Mean?

Subpart (b) of Internal Revenue Code section 6039F refers to the definition of a foreign gift and what is excluded from reporting on Form 3520:

2503(e)(2))

• • • (e)Exclusion for certain transfers for educational expenses or medical expenses

      • (1) In general Any qualified transfer shall not be treated as a transfer of property by gift for purposes of this chapter.

      • (2) Qualified transfer For purposes of this subsection, the term “qualified transfer” means any amount paid on behalf of an individual—

        • (A) as tuition to an educational organization described in section 170(b)(1)(A)(ii) for the education or training of such individual, or

        • (B) to any person who provides medical care (as defined in section 213(d)) with respect to such individual as payment for such medical care.

6048(c)

• • •  In General

      • If any United States person receives (directly or indirectly) during any taxable year of such person any distribution from a foreign trust, such person shall make a return with respect to such trust for such year which includes—

    • I.R.C. § 6048(c)(1)(A)

      • — the name of such trust,

    • I.R.C. § 6048(c)(1)(B)

      • — the aggregate amount of the distributions so received from such trust during such taxable year, and

    • I.R.C. § 6048(c)(1)(C)

    • — such other information as the Secretary may prescribe.

    • I.R.C. § 6048(c)(2) Inclusion In Income If Records Not Provided

      • I.R.C. § 6048(c)(2)(A)

        • In General – If adequate records are not provided to the Secretary to determine the proper treatment of any distribution from a foreign trust, such distribution shall be treated as an accumulation distribution includible in the gross income of the distributee under chapter 1. To the extent provided in regulations, the preceding sentence shall not apply if the foreign trust elects to be subject to rules similar to the rules of subsection (b)(2)(B).

      • I.R.C. § 6048(c)(2)(B)

        • Application Of Accumulation Distribution Rules – For purposes of applying section 668 in a case to which subparagraph (A) applies, the applicable number of years for purposes of section 668(a) shall be 1/2 of the number of years the trust has been in existence.

(c)Penalty for failure to file information

• • (1)In general

    • • If a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)—

        • (A) the tax consequences of the receipt of such gift shall be determined by the Secretary, and

        • (B) such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).

What does this Mean?

It means that when a person does not properly furnish the information regarding the large foreign gift or trust distribution to the US government by way of filing the proper form, then the US government has the right to penalize the individual upwards of 5% per month for a total penalty of 25% value of the gift.

• • • (2) Reasonable cause exception

      • Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

What does this Mean?

It means that even if a Taxpayer has not properly reported the information regarding the large gifts and trust distributions to the US government — the US government does not have the opportunity to penalize the individual if the individual is able to show the failure to file was due to reasonable cause and not willful neglect. When it comes time for a Taxpayer to prove Reasonable Cause it is important that they frame the facts and circumstances in the best light possible — to show any noncompliance was due to reasonable cause and not willful neglect.

Golding & Golding: About our International Tax Law Firm

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

Contact our firm today for assistance with getting compliant.