New Form 3520 Penalties

In November 2020, the IRS changed the rules for assessing penalties for Form 3520, the Annual Return to Report Receipt of Foreign Gifts. Form 3520 is filed for any U.S. Taxpayer who receives a foreign gift or inheritance totaling over $100,000 (in cash or any assets) in a calendar year. Under the new IRS change, taxpayers who file late are immediately assessed a heavy penalty of up to 25% of the foreign gift. Once assessed a penalty, taxpayers can request an abatement which can take the IRS up to a year to deny. This year alone, our office has helped dozens of taxpayers contest large automatically assessed penalties.

In the past, delinquent taxpayers were allowed to attach a reasonable cause statement to their Form 3520 explaining the reason for filing late. This approach often led to no penalty assessment. However, the IRS website in November 2020 changed with a warning to taxpayers that in reviewing the delinquent return “penalties may be assessed without considering the attached reasonable cause statement.” This means that Taxpayers submitting late returns now receive automatic penalty notices without any meaningful review of submitted statements from taxpayers and advisers.

This is a serious problem and should be revised. One solution to this problem is that instead of a penalty right away, taxpayers could instead get a warning or soft notice the first time they do not timely file. This soft notice would advise delinquent taxpayers of their missed filing, and that a penalty equal to 25% of the value of the gift received would be assessed if delinquent again. With a soft notice system, more delinquent Taxpayers will become aware of the need to file Form 3520 and will be willing to report, thus coming into overall compliance.

Another solution would be for the IRS to start a new program to receive delinquent Form 3520 filings and to review the reasonable cause. This program would be similar to the streamlined filing compliance procedures for reporting and paying unreported foreign accounts and income. Similarly, this would allow delinquent taxpayers who are not under audit to come into compliance without penalties or to have Taxpayers be able to engage with the IRS on their reasonable cause arguments before an assessment of penalties. Since the streamlined filing compliance procedures are already in place, this solution would be relatively easy to implement. This would also encourage voluntary compliance with Form 3520.

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