In November 2020, the IRS changed the rules for assessing penalties for Form 3520, the…
Fantastic Recommendations for Form 3520
The American Institute of CPAs (AICPA) recently sent excellent recommendations to the Internal Revenue Service (IRS) against the IRS’ systemic assessment of penalties for late-filed Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
Our clients have received many Form 3520 penalties over the years, and we have successfully appealed them, but they are a waste of government resources (especially since most of the time we win on appeal). I applaud the AICPA for the recommendations and hope the recommendations will be seriously considered for implementation.
The AICPA recommendations are below:
The American Institute of CPAs (AICPA) is writing about the Internal Revenue Service (IRS) systemic assessment of penalties for late filed Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Specifically, we suggest that the Independent Office of Appeals (Appeals) provide Appeals Case Memoranda (ACMs) where Appeals fully abates penalties relating to Form 3520 and Form 3520-A based on reasonable cause to Campus personnel handling initial reasonable cause requests. If Appeals decides that sharing ACMs is not possible or feasible, we recommend that Appeals coordinate with Office of Servicewide Penalties to provide Campus personnel with a summary of Form 3520 and Form 3520-A cases where Appeals fully conceded the penalty based on reasonable cause, including the factors that Appeals relied upon in each case to make these concessions.
We understand that the IRS has a policy of systemically assessing maximum penalties when it receives a late filed Form 3520 or Form 3520-A at the IRS Service Center Campus in Ogden, UT and not considering attached reasonable cause statements. The penalty notice, typically a CP15, informs the taxpayer at the bottom of page two that they can submit a request for penalty relief based on reasonable cause within 30 days, regardless of whether a reasonable cause statement was attached to the late-filed Form 3520 or Form 3520-A.
In practically every case where reasonable cause statements are provided in response to Form 3520 and Form 3520-A penalty notices, the practitioner community has observed that Campus personnel routinely deny penalty abatement and then issue a Letter 854C. The only recourse for taxpayers after Campus personnel deny their penalty abatement request is to take their case to Appeals.
Based on anecdotal information from Appeals Officers, the IRS’s systemic assessment of maximum Form 3520 and Form 3520-A penalties results in a substantial number of cases going to Appeals. AICPA is appreciative of the role of Appeals to act as a safety valve to prevent unwarranted denial of penalty abatement. In many cases, Appeals fully concedes these cases based
on reasonable cause. We understand that the grounds for resolving these cases are documented in ACMs.
We understand that Appeals has shared feedback with the Office of Servicewide Penalties on issues where Appeals has seen a pattern in cases being sent to Appeals where the cases should have been resolved by Campus personnel. For example, it is our understanding that in the past, Appeals has brought issues to the attention of the Office of Servicewide Penalties regarding the application of first-time abatement, the rules for managerial approval under section 6751(b), and compliance with Internal Revenue Manual provisions, and after the Office of Servicewide Penalties took action, Appeals received fewer cases. We suggest that Appeals do something similar with providing input to Campus for training of Campus employees regarding reasonable cause. Resolving cases at the lowest possible level will save taxpayers Appeals, and the Campus time and cost.
We recommend that Appeals provide ACMs reflecting a 100 percent abatement (or refund) of Form 3520 or Form 3520-A penalties for reasonable cause to the Campus personnel handling the initial consideration of reasonable cause. This idea is similar to what is done in certain types of cases that Appeals receives from LB&I. See generally I.R.M. 184.108.40.206.4. If Appeals decides that sharing ACMs is not possible or feasible, Appeals should coordinate with the Office of Servicewide Penalties to provide Campus personnel with a summary of Form 3520 and Form 3520-A cases where Appeals fully conceded and abated the penalty based on reasonable cause, including the factors that Appeals relied upon in each case to make these concessions.
Providing real-world feedback to Campus personnel will assist them in developing more experience in properly evaluating reasonable cause abatement requests. Examples where Appeals found reasonable cause and conceded the penalty for the failure to timely file Form 3520 and Form 3520-A will help train Campus personnel. In turn, that training will result in more accurate application of the reasonable cause standard, which should (i) reduce the workload for Appeals and (ii) reduce the costs for taxpayers contesting systemic penalty assessments.
The costs to taxpayers in contesting these penalties can be significant. The law in this area is particularly complex and impacts many otherwise compliant taxpayers. It is particularly discouraging for taxpayers who are voluntarily coming into compliance to face systemic penalty assessments and denial of reasonable cause. This is especially true for middle income taxpayers who are being conservative and reporting foreign pension-type plans as foreign trusts. Many times, these taxpayers are unable to pay or are caught up in the cycle of correspondence and face collection activity, which increases the number of collection due process cases.
This proposal will not address all the challenges relating to Campus based systemic assessments of Form 3520 and Form 3520-A penalties, but it should lead to quicker resolution of cases with the IRS and reduce Appeals inventory of these penalty cases.
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