The IRS Ends Automatic Form 3520 Late-Filed Penalties

IRS To Reverse Course on Form 3520 Penalty Enforcement

IRS To Reverse Course on Form 3520 Penalty Enforcement

Finally, after many years of Tax Practitioner challenges to the IRS enforcement protocols for international information reporting penalties – with a focus on Forms 3520/3520-A — the Internal Revenue Service has taken notice. The NTA blog (National Taxpayer Advocate) recently reported that the IRS intends to modify Form 3520 penalty enforcement procedures. Our international tax law specialist team has written countless articles about the challenges many Taxpayers face when seeking to challenge a Form 3520 penalty. That is because Form 3520 penalties are ‘automatically assessed’ — and depending on how the IRS responds to a Taxpayer’s late filing can impact what type of procedures the Taxpayer has available to them to fight the IRS and seek a Form 3520 penalty waiver or abatement. Let’s take a brief look at what may come next.

First, Why Are Form 3520 Penalties a Problem?

The main issue with Form 3520 penalties is that the IRS automatically assesses penalties against Taxpayers who file a late Form 3520. While Form 3520 can be used for many different purposes, the main catalyst for having to file it is when a U.S. person receives a gift from a non-resident — including foreign parents and relatives. In a now all too common situation, a U.S. person may receive a large gift from a foreign relative but only learns about the reporting requirements several months (or years) after the time to file a timely Form 3520 has passed. Once the IRS receives the late Form 3520 — even if it is accompanied by a reasonable cause letter — the IRS may automatically assess penalties against the taxpayer, which puts the taxpayer under enormous pressure and stress when challenging the fine.

What Will the IRS Change About the Late Form 3520 Filing Rules?

As provided on the National Taxpayer Advocate Blog (10/24, updated 10/25):

• • • “By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) § 6677 penalty. This favorable change will reduce unwarranted assessments and relieve burden on taxpayers by giving them the opportunity to explain their situation before the IRS assesses a penalty. TAS has recommended these changes for years and the IRS listened. IRS Commissioner Danny Werfel announced these changes during the UCLA Extension Tax Controversy Conference.”

Initial Thoughts on What Lies Ahead

While the Internal Revenue Service has not yet published any information specifically regarding the upcoming changes and how enforcement and challenges to Form 3520 penalties will work, it is a welcome relief to U.S. Taxpayers who may be at risk for Form 3520 penalties. Taxpayers who are out of compliance will presumably still have to show reasonable cause to avoid or abate penalties, but at least the Taxpayer may now have a chance to fight the penalty before it is ever assessed in the first place.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.