Foreign Gift Received: Form 3520 Penalties Eliminated in New Court Case

The US DOJ Tax Division recently conceded penalties assessed against a police officer for failing to file informational returns on for a foreign gift. Krzysztof Wrzesinski, a Polish-American citizen, had failed to file Form 3520, or the “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts,” for $830,000 in cash he received from his mother in 2010 and 2011 after she won the Polish lottery.

Mr. Wrzesinski had engaged an accountant when he received the windfall, but he was advised that the gifts were exempt from income (correct) and that no filings were required (incorrect). After realizing his mistake, Mr. Wrzesinski contacted a tax attorney (not me) and filed a reasonable cause statement under the Delinquent Informational Return Submission Procedures (DIIRSP). The IRS nevertheless assessed penalties (25%) totaling $207,500 under IRC 6039F(c)(1).  The case is similar to many of our clients’ situations where large penalties are assessed.

Wrzesinski appealed and even provided a letter from his accountant acknowledging the incorrect advice, but IRS appeals only abated 80% of the penalties based on the ‘Hazards of Litigation’. Mr. Wrzesinski paid the remaining $41,500 and filed for a a refund claim in US District Court.

In his claim, Wrzesinski pointed out that IRC 6039F(C)(2) states that penalties imposed under subsection (c)(1) shall not apply if the taxpayer can show reasonable cause similar to precedent set in Estate of La Meres v. Comm’r, 98 T.C. 294 (1992), and United States v. Boyle, 469 U.S. 241 (1985).

The DOJ subsequently agreed conceded the matter via letter to Mr. Wrzesinski’s counsel, and that the taxpayer should expect a check issued within six to eight weeks of the date of the letter. 

The Wrzesinski win comes after a major taxpayer victory in Bittner v. United States, where the US Supreme Court determined that the IRS could only penalize taxpayers once per-form (instead of per-account) per-year for failing to file a Report of Foreign Bank and Financial Accounts (or “FBAR”). The Wrzesinski and Bittner cases may indicate a move by the IRS and Tax Division of the DOJ to show more leniency towards taxpayers who report failures to file international informational returns when they can properly show reasonable cause for doing so. 

The case is Wrzesinski v. US, No. 2:22-cv-03568, (E.D. Pa. Mar. 7, 2023).

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