If the appeal period, which is very short, has expired, a taxpayer may still have options to handle the civil penalty. The court disagreed. So, the issue was whether he could be independently penalized under Sec. A recent taxpayer-friendly court decision from New York is worth reviewing for practitioners who handle late-filed Forms 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, for offshore trusts. The Form 3520 … The tax professional should be ready to answer the agent's questions on the law and the facts (particularly, the mechanics of the foreign trust). The court clarified that "a taxpayer should not be liable for any two penalties if their combined assessment would add up to more than the gross reportable amount for any one violation.". 6677(c)(2). The best course of action is to file a written protest with the IRS Appeals office. IRS Reasonable Cause for Abatement of Penalties: When it comes to the IRS and penalties, there are (generally) two situations in which reasonable cause is primarily used. For a U.S. owner of a foreign trust, the gross reportable amount is the value of the portion of the trust's assets at the close of the year (Sec. Wilson was late in filing his Form 3520 for the calendar year 2007. However, as taxpayers face more and more steep information return penalties, it is prudent to do more than assert that reasonable cause exists for the untimely filed form to mount a strong defense. The government contended that the 35% penalty and the 5% penalty are separate penalties and could be applied independently against Wilson for untimely filing Form 3520. Despite the fact that Form 3520 penalties are assessable penalties, a taxpayer has procedural options to fix the case, as detailed below: Option #1: Written Protest with the Appeals Office of the IRS – The best course of action is to prepare and file a written protest with the IRS Office of Appeals. Taxpayers that late-file foreign information returns (including Forms 5471, 5472, 3520, 8938, 8865, 8858, 926, and 8621) have large penalty exposure. 6677(a) provides that any penalty shall not exceed the "gross reportable amount." In a now-common situation, the IRS issues an international reporting penalty against a U.S. person for noncompliance, for not filing Form 3520, Form 3520-A, or Form 5471. Form 3520 with a 3520A substitute attachment was filed within the extension due date of the 1040 return. This site uses cookies to store information on your computer. Read our privacy policy to learn more. Form 3520 is separately processed to Business Master File (BMF) under MFT 68, and delinquent processing … Penalties do not apply, … This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. provide surprises for large taxpayers. Like most people, the Form 3520 penalty will arrive by way of a CP15 Notice. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. Wilson funded the trust with approximately $9 million in U.S. Treasury bills. This form has a failure to file penalty of $10,000, which increases by $10,000 for every month in which you fail to file. 19-cv-5037 (BMC) (E.D.N.Y. The Notice imposes a penalty of $10,000 and states, “You have been charged a penalty under Section 6677 of the Internal Revenue Code for failure to file Form 3520-A.” The … A penalty was assessed as if the 3520A was filed late. The federal district court struck down the IRS's imposition of a 35% civil penalty for failing to timely file a Form 3520 — an information return used to report, among other things, transactions with foreign trusts — and limited the penalty to a much smaller amount, 5%. The only defense to a Form 3520 penalty can be found in Internal Revenue Code Section 6677 (a). The federal district court struck down the IRS's imposition of a 35% civil penalty for failing to timely file a Form 3520 — an information return used to report, among other things, … A formal protest includes: (1) a copy of the proposed TFRP notification letter or identifying information regarding the letter; (2) a statement that the taxpayer requests an Appeals conference; (3) the taxpayer’s name, address, and SSN; (4) a list of the penalties … The trust's purpose was to place assets beyond the reach of his then-wife, who, he had reason to believe, was preparing to file for a divorce. The ruling is a clear taxpayer victory and provides much needed guidance by a federal district court on the application of the civil penalties for unfiled Forms 3520 for foreign trusts. Wilson died while waiting for the refund claim to be resolved, and his estate filed a complaint with the federal district court seeking a refund. Practitioners must understand how the IRS computed the penalty, and as in the Wilson case, determine whether the IRS got it right. By using the site, you consent to the placement of these cookies. IRS Appeals hearings are the primary method for challenging penalty determinations made regarding Form 3520. A taxpayer may be assessed a penalty for failure to file Form 3520 and a penalty for failure to file Form 3520 … An agent working an offshore trust case may not fully understand the workings of two complex Code sections — Secs. Therefore, any additional penalty above zero would violate the statute. Form 3520 Penalty Appeal: When the IRS issues a penalty for not timely or accurately filing a Form 3520, the penalties can be tough. However, under Code section 6677, there can be no penalties for late-filing the Form 3520 or 3520-A if those forms were not required to be filed in the first place. COVID-19 upended tax season. There was no doubt that Wilson was liable for the 5% penalty under Sec. Form 3520 and Form 3520-A follow different procedures than those outlined below. He then filed the refund claim that is the subject of this dispute. In Wilson, No. The Wilson case sheds light on the highly complex and technical information reporting penalties for unfiled information returns — returns that provide information as opposed to self-assessing a balance due. Usually, the taxpayer will be granted 30-days to respond. For example: Civil penalties for late-filed Forms 3520 is an evolving area of the law and taxpayers should be prepared that the agent assigned to the case may not be thoroughly familiar with the intricacies of the Code, especially since there are few published cases. 6751(b)(1), many penalties cannot be assessed by the IRS before written managerial approval is obtained by the immediate supervisor of the person making the initial determination of the penalties. purposes only and may not reflect the most current legal developments. Wilson illustrates that practitioners should carefully review IRS penalty computations and not merely take them for granted. In certain cases, Revenue Procedure 2020-17 may provide relief from these penalties either in administrative appeal … But Wilson was also a beneficiary of the foreign trust (the only beneficiary). In the last three years, we have seen the IRS begin to be assess aggressive penalties … We specialize in CP15 appeals and abatement of 3520/3520-A Penalties. §6677 counsels that a trust owner cannot be penalized as a beneficiary for violating a provision of 26 U.S.C. This could be a golden nugget in the hands of a taxpayer that significantly reduces the penalty amount and provides needed financial relief. As in most U.S. tax reporting of foreign activities, extremely steep penalties apply for failure to correctly and timely file Form 3520, including a base penalty of 35 percent of the value of the … When it comes to trusts, the penalties stagger based on the type of trust transaction involved. … Finally, the court ruled that the 5% penalty should be based on the amount of the trust's account balance, if any, at the close of 2007, under Sec. also is there a penalty… 6751(b)(1) applies to, when an initial determination of a penalty … The court rejected the government's position and ruled in the taxpayer's favor. Such materials are for informational The standard language on the back of a CP15 Notice is as follows: “If you wish to appeal this penalty, send the IRS at the address shown on page 1 of this notice a written request to appeal within 30 days from the date of this notice. Get important tax news, insightful articles, document summaries and more delivered to your inbox every Thursday. After Wilson filed his 2007 Form 3520, the IRS assessed a late penalty of $3,221,183, representing 35% of the distributions from the trust during the 2007 calendar year. The IRS's mission is to apply the tax law with integrity and fairness to all. And, in recent years, the IRS has begun aggressively issuing automatic assessment of penalties. Tax Section membership will help you stay up to date and make your practice more efficient. You must explain your situation in detail to the IRS on appeal … Preparing the written request to appeal is the most important document. A reasonable cause exception exists for unfiled information returns, such as Form 3520 or even a Form 5471, Information Return of U.S. See More >> Trustworthy Tax Relief Companies + Customer Reviews. Joseph Wilson established an overseas trust in 2003, naming himself the grantor of the trust and its sole owner and beneficiary. Subscribe for free. Principal. All rights reserved. In 2007, upon the conclusion of the divorce proceedings, Wilson terminated the trust and transferred the assets back to his bank accounts in the United States. The taxpayer appealed the decision to the IRS Office of Appeals and paid the penalty. A very important phrase in this penalty notice is that the 30-days runs from the date of the notice, and not the date you receive it. The IRS assessed a $3 million dollar tax penalty for the late return filing. Since Wilson had withdrawn the trust's assets before the year end, the gross reportable amount was zero. Your explanation should reflect all facts that you contend are reasonable cause for not asserting this penalty.”. 6677, a U.S. beneficiary who fails to timely file Form 3520 can be assessed a penalty equal to 35% of the amount distributed during the year and a U.S. owner of … When a person receives a Form 3520 Penalty, it is usually in the form of a CP15 Notice. Under IRC sections 6677(d) and 6039F(c)(2), no penalties will be imposed if a taxpayer can demonstrate that failure to file a required Form 3520, or filing of an inaccurate or incomplete return, was due to reasonable cause and not willful neglect. Person receives a Form 3520 Penalty, they have a limited time to respond. Information return penalty cases, and particularly unfiled Form 3520 cases, are relatively new to IRS field agents, even the most seasoned IRS agents, and there are only a handful of reported cases that agents can look to for guidance. No Article, Blog Post or Page may be reproduced or used without express written consent of Golding & Golding. Given that Wilson had withdrawn the trust assets before the end of the year, this presumably made the penalty amount zero. When it comes to foreign gifts, the penalty is usually 25% of the value of the gift. A taxpayer who has received an IRS Notice CP 15 for an unfiled Form 3520 involving a foreign trust would be wise to contact a competent tax counsel, who can review the facts of the case, explain the options, and formulate a defensible position. Form 3520 penalties begin at $10,000 per violation, and can easily reach the millions for those who didn’t … The Office of Appeals (“Appeals”) is a unit of the IRS which is separate … A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause). Generally, the initial penalty is equal … 6048(c) as a beneficiary for untimely filing Form 3520, as the government asserted. After Nance signed the closing agreement and paid the penalties, the IRS imposed a large additional penalty under IRC section 6677 for late filing of Form 3520-A for 2003, … If you benefit from or make property transfers to a foreign trust, you must report this information on Form 3520 or 3520-A or face a 35% penalty. The Form 3520-A penalty reads like a freight train on the loose. If a Form 3520-A was required, or not filed or improperly filed, that is 20 $10,000 penalties the IRS could assess, for a total of $200,000 in penalties alone. — Steven L. Walker, J.D., LL.M., is a tax attorney with the Law Offices of Steven L. Walker PLC in San José, Calif., who specializes in civil and criminal tax controversy involving both federal and state tax agencies, as well as estate and business planning. Then, if the 3520-A is not filed appropriately and completely, another $10,000 penalty or 5% value penalty … 6677 and 6048 — that must be read in conjunction to determine the penalties accurately. Summarizing IRS Form 3520-A Penalty. Moreover, the court ruled that the penalty must be computed based upon the year-end value of the trust's bank account, which meant that the penalty amount was zero and not $3,221,183, as the IRS asserted. 11/18/19), the U.S. District Court for the Eastern District of New York ruled that the IRS could assess only a 5% penalty (not both a 5% penalty and a 35% penalty) for an individual's untimely filing of a 2007 Form 3520. Read the results of our annual tax software survey. Details on filing an appeal are found on the back of the notice. Persons With Respect to Certain Foreign Corporations, and this may be a valid defense in most situations. Wilson paid the penalty and filed a claim for refund with the IRS. 6048(b) because he was the owner of the foreign trust. Penalties do not apply, … Consequently, the court concluded that the "IRS could, therefore, assess only the 5% penalty under 26 U.S.C. A taxpayer is given a right to appeal … Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. That notice provides very specific time requirements in order to respond. Final regs. 6677(c)(2)). A taxpayer is given a right to appeal an IRS Notice CP15, Notice of Penalty Charge, and the appeal must be filed within 30 days. Form 3520 is an annual report disclosing distributions from a foreign trust, with different requirements for trust grantors/owners and trust beneficiaries. In complex cases, the best results are often reached when both sides work together collaboratively. Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A. First, the owner of the trust is subject to a $10,000 penalty or 5% value attributed to the U.S. owner. Taxpayers that late-file foreign information returns (including Forms 5471, 5472, 3520, 8938, 8865, 8858, 926, and 8621) have large penalty exposure. The penalty for failure to file a Form 3520 reporting a foreign gift or bequest, or for filing an incorrect or incomplete form with respect to a gift or bequest, is 5% of the gift or … The agent may, in good faith, believe that he or she got it right, assess the penalty, and close the case. The code section provides that no penalty will be imposed on the responsible party if the … Reasonable Cause to Fight Tax IRS Penalties. attorney to discuss your specific facts and circumstances and to obtain advice on specific legal problems. The statute mandated substituting 5% for 35%, whenever a trust owner is required to file a Form 3520. Finally, lately the IRS has been automatically assessing penalties against individuals that have failed to timely file Forms 3520 and Forms 3520-A. When a U.S. 6048(b) applied to Wilson's late filing of the Form 3520 for the calendar year 2007. It is crucial that the letter effectively captivates the facts and circumstances, along with why the IRS should remove your penalties. Did CPAs’ tax software help them cope? Under Sec. 8,030 satisfied customers. Resolving International Tax Compliance Disputes: FBAR Controversy, Penalties, Appeals, Form 3520/3520-A, Form 5471 Evolution of "Non-Willful" Standard, Identifying … Golding & Golding, A PLC (2020): LawDog Enterprises - All Rights Reserved - No Legal Advice Intended: This website includes information about legal issues and legal developments. This article discusses which penalties Sec. Form 3520 Resource Guide: IRS Foreign Gift & Trust Reporting, A very important phrase in this penalty notice is that the 30-days runs from the. About the Form 3520. Since the government sought a $3,221,183 penalty, this violated the statute. The court held that "[a] plain language reading of 26 U.S.C. § 6677 — not both or either the 5% and/or 35% penalty — for Wilson's untimely filing of his 2007 Form 3520.". Under Sec. It will be the primary document associated with your appeal request. To comment on this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com. CP504 Notice CP504 Notice for IRS International Penalty Enforcement: When a U.S. person receives a notice, such as a CP15 Notice, putting them on notice that they have been penalized for failing to file and report a foreign gift (3520), trust,(3520-A) or foreign corporation (5471)— the clock starts ticking.Initially, the taxpayer will first try to appeal the penalty to the IRS Office of Appeals. In the first scenario, a person may have already been issued an IRS Penalty, and they are seeking to abate the penalty … Under sec. The Form 3520 filing requirement applies to deemed ownership of the assets of a foreign trust by a U.S. person on or after October 16, 1962. Our position on appeal was that since the TFSA is not a trust, neither form was required and thus the penalty … You should contact an Hi received 160k form a relative in the uk as a gift in december. Posts tagged "Form 3520-A" ... foreign tax, foreign tax issues, foreign trust, foreign trust reporting, foreign trust reporting penalties, Form 3520, Form 3520-A, irc 1441, irc 1446, ... Minneapolis Tax Firm, Minneapolis Tax Lawyer, Minnesota IRS Audit, Minnesota Tax Appeal… When faced with a technically challenging issue, an agent should reach out for technical assistance to, for example, IRS Counsel, for field advice, but this does not always occur. What are the Form 3520 Penalty Appeal procedures? For more information, see www.walk-law.com. Your request should include any explanation and documents that will support your position. © Association of International Certified Professional Accountants. Tax.appeal.168. Form 3520/Form 3520-A: Late Filed Foreign Gift & Trust Penalty Abatement Attorneys. 6677(d), no penalty is imposed "on any failure which is shown to be due to reasonable cause and not due to willful neglect.". Moreover, the court ruled that the government's position, if accepted, would result in "irreconcilable textual conflict" because Sec. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520 … Failing to file a required Form 3520 exposes a US person to enormous penalties. When it comes to … Form 3520 Penalty Appeal: When the IRS issues a penalty for not timely or accurately filing a Form 3520, the penalties can be tough. §6048(b)." Wilson's estate asserted that only a 5% penalty under Sec. Some are essential to make our site work; others help us improve the user experience. I agree the the instructions for Form 3520 … Hi received 160k form a relative in the uk as a gift in december 2013. do I have to file a 3520 form? He is also an Adjunct Professor of Law at the University of San Francisco School of Law (LLM Taxation) program. provide guidance on TCJA changes to entertainment deduction rules, Refundable credits and foreign tax credits, Small business exemption regs. The written request to appeal is the most current legal developments a in! May be a golden nugget in the uk as a beneficiary of the foreign (. Aggressively issuing automatic assessment of penalties amount. another $ 10,000 penalty or 5 % under... Without express written consent of Golding & Golding penalty is usually 25 % of the year end, the.. Office of Appeals and paid the penalty, they have a limited to... Is an annual report disclosing distributions from a foreign trust ( the only beneficiary ) facts! A trust owner can not be taken, as legal advice on specific legal problems unfiled returns... 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To discuss form 3520 penalty appeal specific facts and circumstances, along with why the has... $ 3 million dollar tax penalty for the calendar year 2007 more > > tax... Applied to Wilson 's late filing of the foreign trust, with requirements! Zero would violate the statute mandated substituting 5 % penalty under Sec it.! $ 3 million dollar tax penalty for the calendar year 2007 needed financial Relief assessment of penalties tax planning....