Comments on IRS Form 3520 to Report Foreign Gifts

The Florida Bar Tax Section recently made some excellent comments in response to the Internal Revenue Service’s request for comments concerning Forms 3520 and 3520-A. The comments were intended to enhance the quality, utility, and clarity of the information to be collected. Some of the selected comments are pasted below.

The first encourages the IRS to create a new Form 3520 (maybe Form 3520-I for inheritance). The most current of Form 3520 pertains to foreign trust reporting, which is entirely irrelevant to a U.S. person filer who seeks to report a large foreign gift or inheritance received. It is confusing and nonsensical to keep disparate reporting in the same form.

The second comment encourages the IRS to publicize that the IRS is currently assessing maximum penalties for late and amended Forms 3520, which is not the case for most other international reporting tax forms. As a result, unsuspecting U.S. person filers who fail to timely report a significant foreign gift or inheritance are subject to punitive penalties. Our firm has spent countless hours helping penalized clients. After much advocacy, we find the IRS ultimately abates (canceling) almost all such penalties.

The last comment asks the IRS to abate Form 3520 late penalties via the expansion of its popular First Time Abatement program, which currently abates specific penalties for failure to pay income tax timely.

Move Part IV of Form 3520 to a Separate Form

The current Form 3520 has dual uses — to report transactions with foreign trusts and the receipt of certain foreign gifts. Parts I through III (nearly 5 of the 6 pages) of the current Form 3520 relate only to transactions with foreign trusts. Those parts of the form are more complex and generally irrelevant when the filer is a U.S. person who merely seeks to report a large foreign gift or inheritance. In contrast, Part IV of the current Form 3520, which is less than one page, simply asks the filer to identify the donor and provide the date, description, and fair market value of the gift or inheritance. The dual nature of the form and complexity of Parts I through IV can cause confusion and inefficiencies. Accordingly, we recommend that the IRS create a separate form for reporting large foreign gifts and inheritances.

Clarify the Current Penalty Assessment Environment

Further, we recommend that the IRS make clear to the public and tax professionals that the IRS is currently assessing maximum penalties for late and amended Forms 3520 relating to reporting foreign gifts and inheritances. The IRS’s lack of communication regarding this practice of assessing systemic penalties at maximum rates all the while advertising the Delinquent International Information Return Procedures³ is non-transparent. We request more transparency from the IRS about its penalty procedures and campus practices

Extend First Time Abatement Program to Include Forms 3520 and 3520-A

In addition, we recommend the extension of the IRS’s First Time Abatement policy (“FTA”) to include the Relevant Forms so that taxpayers who fail to timely file these forms may avoid penalty without showing reasonable cause. FTA should apply not only to the first tax year in question, but all tax years filed by the taxpayer during an initial reporting period. For example, if a taxpayer was not aware of the filing obligation, hires new counsel and learns of the obligation, and then files the Relevant Forms for the prior 3, 6 or any amount of prior years in order to come into compliance, the taxpayer should be exempt from penalty for all of the years in question under FTA. This will reduce the chilling effect on compliance and reporting as taxpayers will not be fearful of penalties being assessed for multiple years when trying to come into compliance for the first time.

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