On 10/24/24, the National Taxpayer Advocate shared on its NTA Blog that the IRS has discontinued its policy of automatically imposing penalties for late submissions of Form 3520, which pertains to foreign gifts and inheritances reported in Part IV of the form. By the end of the year, the IRS plans to start evaluating “reasonable cause” statements for late Forms 3520 and 3520-A prior to applying penalties under IRC § 6677. This announcement was made by IRS Commissioner Danny Werfel during the UCLA Extension Tax Controversy Conference, as noted in the blog post. The NTA Blog states that: “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.” That said, it is important to note that taxpayers ought to demonstrate that any noncompliance was due to reasonable cause rather than intentional neglect. It is essential for the Taxpayer to establish this reasonable cause from the beginning. This means that taxpayers need to work with a tax expert to ensure that the reasonable cause explanation is successful at the onset.
IRS Reasonable Cause for Forms 3520 and 3520-A
The IRS states that: “No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.” In addition, the IRS states that “reasonable cause is determined on a case by case basis considering all the facts and circumstances of your situation”.
Form 3520
Form 3520 is the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. U.S. persons (and executors of estates of U.S. decedents) file Form 3520 with the IRS to report:
- Certain transactions with foreign trusts,
- Ownership of foreign trusts under the rules of sections 671 through 679, and
- Receipt of certain large gifts or bequests from certain foreign persons.
Note that a separate Form 3520 must be filed for transactions with each foreign trust.
Form 3520-A
Form 3520-A is the Annual Information Return of Foreign Trust With a U.S. Owner. A foreign trust with at least one U.S. owner files this form annually to provide information about:
- the trust,
- its U.S. beneficiaries, and
- any U.S. person who is treated as an owner of any portion of the foreign trust.
File Form 3520 if any one or more of the following applies:
- You are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding.
- You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust.
- You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who received, directly or indirectly, a distribution from a foreign trust during the current tax year; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year you or a U.S. person related to you received (1) a loan of cash or marketable securities (including an extension of credit) directly or indirectly from such foreign trust, or (2) the uncompensated use of trust property; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you.
- You are a U.S. person who, during the current tax year, received either:
- More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or
- More than the section 6039F threshold amount from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.
Forms 3520 and 3520-A relief does not relieve taxpayers of their obligation to report information concerning foreign gifts and transactions with foreign trusts
The IRS will evaluate whether there is a reasonable cause for the delay in filing before applying any penalties. It is essential for both practitioners and taxpayers to stay alert to their reporting responsibilities regarding foreign gifts and foreign trusts and to ensure that these forms are submitted on time.
Are you a taxpayer with receipts of foreign gifts?
Are you a taxpayer with a foreign trust?
Are you a taxpayer that is required to file Forms 3520 and 3520-A?
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