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On its website<\/a>, the IRS has\nannounced that it has retired its Form 3520\/3520A compliance campaign. In\nwelcome relief for taxpayers, the IRS also indicates in updated IRM procedures\nthat it will assert only one penalty \u2014 rather than the two that may be assessed\nunder IRC Section 6677(b) \u2014 against US citizens and resident individuals who\nown foreign grantor trusts and fail to timely and accurately report their\nownership, as required by IRC Section 6048(b), on both the Form 3520-A, Annual Information Return of Foreign\nTrust with U.S. Owner<\/em>, and Form 3520, Annual Return To Report Transactions\nWith Foreign Trusts and Receipt of Certain Foreign Gifts<\/em>, Part II.<\/p>\n\n\n\n The IRS’s approach in pursuing only one of two possible penalties\nfor a US citizen or resident individual’s failure to timely report ownership of\na foreign grantor trust is a welcome development and reduces double penalty\nexposure.<\/p>\n\n\n\n Background<\/strong><\/p>\n\n\n\n US citizens and resident individuals who are settlors\/grantors or\nbeneficiaries of foreign trusts may be required to file Form 3520-A and\/or Form\n3520 to report (1) ownership of the trust, (2) transfers of property to the\ntrust, or (3) distributions from the trust. Two separate penalties equal to 5%\nof the trust’s value (with a minimum penalty of $10,000) may apply for failure\nto report foreign trust ownership information on Form 3520-A and Form 3520,\nPart II. Separate penalties of up to 35% of a contribution to a foreign trust\nor 35% of a distribution from that trust (both with a minimum penalty of $10,000)\nmay apply for failure to report the trust contribution or distribution on Form\n3520.<\/p>\n\n\n\n LB&I compliance campaign<\/strong><\/p>\n\n\n\n In May 2018, the IRS Large Business & International Division\nannounced the rollout of an F3520\/3520-A Non-Compliance and Campus\nAssessed Penalties campaign (see www.irs.gov<\/a>) to “address noncompliance through a\nvariety of treatment streams including . . . penalties assessed by the campus\nwhen the forms are received late or are incomplete” (see www.irs.gov<\/a>, under the tab “Forms\n3520\/3520-A Non-Compliance and Campus Assessed Penalties”).\nShortly thereafter, in November 2018, the IRS sent informational letters to\ntaxpayers that it determined might have delinquent Form 3520\nor 3520-A filing requirements (see www.irs.gov<\/a>).\nAt some point in 2019, taxpayers started to observe that late-filing Forms\n3520 or 3520-A, even with a DIIRSP statement attached, was resulting in\nthe automatic assessment of penalties, most often a flat $10,000 per form, or\nmore if the assets reported rose above certain thresholds.<\/p>\n\n\n\n Following the receipt of a penalty assessment notice, the only\nadministrative recourse for taxpayers with reasonable cause for their late\nfiling is submitting a written abatement request to the service center that\nissued the notice. Some recent anecdotal evidence from tax practitioners indicates\nthat these requests are routinely being denied. Following a denial from the\nservice center, taxpayers may appeal the decision by submitting a written\nprotest and engaging with an Appeals officer. Though many taxpayers have been\nable to successfully obtain penalty relief at this level, it can take well over\na year from the submission of the initial abatement request until a resolution\nis reached with Appeals. <\/p>\n\n\n\n The IRS has in recent months begun sending increasingly collection\nnotices to taxpayers, often starting just 30 days after the date of the initial\npenalty assessment. The notices inform the taxpayer that the IRS may file a\nnotice of federal tax lien or levy assets to satisfy the penalty and, in some\ncases, result in a taxpayer’s account being referred to IRS Collections before\nthe IRS even responds to the taxpayer’s abatement request.<\/p>\n\n\n\n Updated IRM procedures<\/strong><\/p>\n\n\n\n The IRM instructs IRS employees on when to assess penalties\nrelated to the Form 3520-A and Form 3520, as well as when penalties\nshould not be assessed, indirectly giving taxpayers some\nrelief. Notably, IRM Section 20.1.9.13.4 provides that the IRS will pursue only\none penalty, rather than two penalties as authorized under IRC Section 6677(b),\nfor a US citizen or resident individual’s failure to timely and accurately\nreport ownership of a foreign grantor trust on the Form 3520-A and Form 3520. Specifically,\nIRM Section 20.1.9.13.4 explains that the IRS will pursue penalties for failure\nto report ownership of a foreign grantor trust on the Form 3520-A but will not\npursue penalties for failure to report such ownership on the Form 3520.<\/p>\n\n\n\n