In November 2020, the IRS changed the rules for assessing penalties for Form 3520, the…
Forms 3520, 5471 and 5472 Penalty Relief
In IRS Notice 2022-36, the IRS granted relief from certain failure-to-file penalties and certain international information return penalties for most individual and business taxpayers who did not file tax returns for tax years 2019 and 2020, provided the returns are filed before September 30, 2022. In addition, the IRS will automatically (1) abate assessed, but unpaid, penalties or (2) refund or credit any penalties that were already paid by taxpayers who would have been granted this failure-to-file relief.
Specifics of penalty relief
The penalty relief applies to the following international information returns if they were not timely filed:
- Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) and Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) when they are attached to a late-filed Form 1120 or Form 1065.
- Campus assessment program penalties for Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b))
The penalty relief does not apply to any penalties in an accepted offer-in-compromise under IRC Section 7122, settled in a closing agreement under IRC Section 7121 or finally determined in a judicial proceeding. It also does not apply international information returns not listed in the notice, such as Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) and Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships).
Forms 3520, 5471 and 5472 penalties are very painful.
When a U.S. person receives a gift from a foreign individual or estate the recipient may be required to file Part IV of Form 3520. Form 3520 is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The form is uncommon and little known since few people have to file it on a regular basis. When receiving a gift from a foreign individual, a U.S. person is required to report the gifts when the aggregate amount received during a taxable year exceeds $100,000.
Under I.R.C. § 6039F the failure to file Form 3520 leads to a penalty of 5% per month up to 25% of the total gift. Once the penalty is assessed, the IRS will send Notice CP 15 (or CP 215) to the taxpayer.
Failure to timely file a Form 5471 is generally subject to a $10,000 penalty per information return, plus an additional $10,000 for each month the failure continues, beginning 90 days after the IRS notifies the taxpayer of the failure, up to a maximum of $60,000 per return. A failure to timely file a Form 5472 is subject to a $25,000 penalty per information return, plus an additional $25,000 for each month the failure continues, beginning 90 days after the IRS notifies the taxpayer of the failure, with no maximum penalty.
The IRS has in recent years has been sending collection notices to taxpayers, often starting just 30 days after the date of the initial penalty assessment. The notices inform the taxpayer that the IRS may file a notice of federal tax lien or levy assets to satisfy the penalty and, in some cases, result in a taxpayer’s account being referred to IRS Collections before the IRS even responds to the taxpayer’s abatement request. Following the receipt of a penalty assessment notice, the only administrative recourse for taxpayers with reasonable cause for their late filing is submitting a written abatement request to the service center that issued the notice. Some recent anecdotal evidence from tax practitioners indicates that these requests are routinely being denied. Following a denial from the service center, taxpayers may appeal the decision by submitting a written protest and engaging with an Appeals officer. Though many taxpayers have been able to successfully obtain penalty relief at this level, it can take well over a year from the submission of the initial abatement request until a resolution is reached with Appeals.
Taxpayers who did not timely file tax or information returns for 2019 and 2020 should IMMEDIATELY evaluate whether this relief covers their situation and then file missing forms by September 30, 2022.
Of particular note, taxpayers who file Forms 3520 and 3520-A (which can generate significant penalties based on the value of the trust/gift) and incurred penalties via the campus assessment program should note that their penalties should now be automatically abated for tax years 2019 and 2020.
While this penalty relief is welcome, the requirements to file the impacted returns by September 30, 2022, may create a significant challenge. Thus, immediate action may be required for Taxpayers who have not yet filed the impacted returns. In order to qualify under this Notice, the tax return or IIR must be filed by September 30, 2022.
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