Is IRS Authorized to Assess 6039F Late Form 3520 Penalties?

Is IRS Authorized to Assess IRC 6039F Late Form 3520 Penalties?

Can the IRS Assess IRC 6039F Late Form 3520 Penalties?

Unfortunately, after November 2020 and the modification of the Delinquent International Information Return Submission Procedures, many IRS agents went rogue and began issuing penalties for certain international information reporting forms that were filed late. While some Citizens and Permanent Residents can avoid penalties with the Streamlined Foreign Offshore Procedures, not all Citizens and Permanent Residents are eligible and qualify for SFOP. And, out of all the different forms that got hit, one of the forms that was hit the hardest was Form 3520. This resulted in gobbles of misinformation online about what the IRS has the right to do — and whether taxpayers can even be assessed for Form 3520 penalties in the first place when a Form 3520 is filed late. Let’s walk through the basics of what the IRS can and cannot do.

First, What is IRC 6039F?

Section 6039F of the Internal Revenue Code deals with the issuance of large gifts by foreign persons who are non-resident aliens to U.S. persons. The law has been around for nearly 30 years and was introduced back in 1996. The concept behind this law is that the IRS wanted to require U.S. persons to report gifts they received from foreign persons because the foreign persons giving the gifts were not required to report for U.S. gift and estate tax purposes on Form 709 the same way that U.S. persons are. Thus From the IRS’ perspective, without a code section like 6039F, large assets can transfer into the United States of which the IRS does not have any information — and then the IRS is unaware when the U.S. person who received the gift passes away for purposes of estate taxes.

Can the IRS  Issue 6039F Penalties?

Yes. At present, there is no case that (at the time of this article) prevents the IRS from issuing, enforcing, and collecting on 6039F penalties for late filing of Form 3520.

There is the recent U.S. Tax Court case of Farhy, but that does not directly deal with section 6039F, as discussed below.

Farhy Does Not Address Form 3520

In Farhy, the Tax Court came to the taxpayer-friendly decision that the IRS did not have the power to automatically assess Form 5471 penalties (for non-reporting of foreign corporations). The concept of ‘automatically assessing’ penalties is the idea that the IRS can penalize taxpayers for not properly reporting certain forms such as Form 5471 without providing the taxpayer any notice that the penalty is coming — until the taxpayer receives a CP15 Notice letting them know the penalty has been assessed. This puts the Taxpayer under excessive duress since the penalty has already been ‘assessed.’

Specifically as to form 5471, the tax court Farhy rules that the IRS was not able to issue these types of penalties.

So, while taxpayers are in a good position to try to argue that the Farhy concept should apply to late-filed Form 3520, this does not mean the IRS is currently not empowered to issue Form 3520 penalties.

Farhy is Currently on Appeal

It is also important to note that the US government filed a Notice of Appeal on this case and so they have every intent of fighting the tax court’s decision.

Do You Have to Go To Court to Fight a Late 6039F Form 3520 Penalty?

No. Our Board-Certified Tax Law Specialist Team has successfully represented taxpayers across the globe with Form 3520 penalties based on a 6039F violation, with penalties ranging in the six and seven figures. Most of the time, it does not require the filing of any formal federal court pleading in the District Court or the Court of Appeals. More often than not, taxpayers can fight the penalties at the appeals level with the IRS or with a collection due process hearing. Sometimes, the IRS will not issue penalties based on the reasonable cause letter submitted with a late-filed Form 3520 — and even if they do other times they will waive the penalty based on the protest letter provided by counsel following the issuance of a Form 3520 penalty.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their 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. 

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.