Beware of Form 3520 for Expatriates Giving Gifts to US Persons

Form 3520 Penalty

Form 3520 Penalty

Form 3520 Penalty: The Internal Revenue Service has significantly increased the issuance and enforcement of the Form 3520 Penalty for failing to report a large gift from a foreign person (individual or entity) — and/or failing to report a foreign trust distribution — to a US Person. With Form 3520, it is the US Person who is required to report the information to the IRS. The penalty for a Form 3520 violation is very unfair, as it is not due to any tax liability owing. In fact, oftentimes the 3520 Penalty under IRC 6039F is issued in a situation in which a US person may have simply received a gift from a Foreign Person relative (such as a parent or grandparent) — and the Taxpayer did not know to report the gift, since there was no income associated with the gift. Let’s go through the basics of Form 3520 Penalties and what expatriates need to look out for —

What is Form 3520

Form 3520 is an IRS International information reporting form, which is used by US persons to report large gifts they receive from either foreign individuals or foreign entities. The form 3520 is also used by US Persons to report any distribution they receive from a Foreign Trust during the tax year.

Due Date for Form 3520

When the form is being filed by individual US persons to report foreign gifts, the form is usually due on April 15 — at the same time the tax return filing due. If a Taxpayer files an extension to file their tax return — the Form 3520 goes on extension as well. It should be noted that the timelines and extension rules for Form 3520-A are different.

Late Filed Form 3520 Penalty Assessable Penalties

Not everyone who files a late Form 3520 will be penalized, but penalties are becoming much more common as the Internal Revenue Service has increased enforcement. The Form 3520 penalty is different than other types of tax penalties for two main reasons —

• It is not based on the tax liability; and
• There may be no outstanding tax liability due

In other words, a Taxpayer can be penalized for form 3520 even if they have no taxes due or unreported income.

CP15 Form 3520 Penalty Notice

Oftentimes, a Taxpayer receives notice of a form 3520 penalty (6039F), when they receive a CP15 notice. The notice normally involves a single-page document with writing on the front and back of the form — and provides the taxpayer some basic information about the basis for the penalty. It also provides some options the Taxpayer has in moving forward to either protest or pay the penalty amount due.

30-Days to Respond to a CP15 Notice

The CP15 provides the Taxpayer with the amount of the Form 3520 penalty — along with a 30-day notice to protest the penalty. If the Taxpayer misses the time to file the protest, it impacts the path they use to go forward in the process. When a Taxpayer submits a response letter — and possibly a subsequent response letter and/or hearing to the supervisor — they have a good opportunity to try to waive or abate the penalty.

Reasonable Cause and Not Willful Neglect

The IRS does not have the authority to issue a Form 3520 penalty when the Taxpayers is able to show that the penalty stemmed from reasonable cause and not willful neglect. There is no bright-line test to determine reasonable cause, but oftentimes a Taxpayer will have significant facts and circumstances to abate (remove) the penalty. The Taxpayer must persuade the IRS that, based on the ‘totality of the circumstance’ — Taxpayer should be relieved from Form 3520 penalties.

Pay Amount, Claim Refund and Sue in Court

If the Taxpayer does not want to go through the process of submitting a reasonable cause statement and going through the appeals process — they can take an alternative route by paying the amount due, claiming a refund — and if the IRS disagrees with the refund request — filing a lawsuit in Court.  While technically in order to sue the IRS for tax liability the Taxpayer must first pay the amounts due — it is important to note that form 3520 penalty is not a tax — and in another recent case involving the FBAR (which is also not a tax), the court held that Taxpayer did not have to make for payment before filing suit in District Court.

Form 3520 Penalty Protest Letter Rejected & 60-More Days

Generally, if the Taxpayer takes the opportunity to protest with the IRS at the CP15 Notice and the protest is rejected — Taxpayer will have another opportunity to re-submit the protest — with additional documentation/information to the supervisor. Sometimes, once the Supervisor has taken an opportunity to review, the IRS will agree to abate the penalty.

Wait for CDP (Collection Due Process, Form 12153)

If the Taxpayer is unsuccessful, then what typically will happen is that if they do not pay the Form 3520 penalty — the IRS will continue to seek enforcement against the taxpayer with a series of 504 and 503 notices. After the Taxpayer has not made payment after several attempts by the IRS to collect, the Internal Revenues Service will either issue a Notice of Federal Tax Lien or an Intent to Levy against the bank account. At that time, the Taxpayer may file a Collection Due Process hearing request — and the matter will go before an SO (Settlement Officer) — who has more authority to settle the case.

6751 & FOIA

Internal Revenue Section 6751 provides specific requirements that must be for certain penalties to be valid for enforcement. Namely, the penalty must have received the written authorization/approval from a supervisor. In practice, this generally does not apply to Form 3520 matters since the penalties meet the automatically authorized by electronic means exception. Taxpayers may be able to obtain information regarding the penalty (sometimes) by making a FOIA request — but for timing purposes, it can have a negative impact on the case it is not timed properly and something to consider when consulting with a specialist.

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