Is Failure-to-File Form 3520 a Crime or Civil Violation (Examples)

Is Failure-to-File Form 3520 a Crime or Civil Violation (Examples)

Is Failing to File Form 3520 a Crime or Civil Violation?

Oftentimes, once a US Taxpayer learns that they are out of compliance for missing an Internal Revenue Service filing requirement their imagination can get the best of them — and they incorrectly presume that every tax violation or reporting violation is a crime that can possibly land them in prison. In general, violations of the Internal Revenue Code are not criminal, but rather civil. That means, that while their may be monetary fines and penalties – and these penalties may be substantial especially in the world of international information reporting –– it is usually not a criminal violation that would result in incarceration. That is not to say that a person cannot become criminally liable for failing to file a Form 3520, but generally the failure to file is not a tax crime. Let’s take a look at a few examples:

Missed Form 3520 Filing (Example 1)

Denise is a Lawful Permanent Resident who received a foreign gift from her aunt who is a non-resident alien. Denise was unaware of the Form 3520 reporting requirements at the time of the gift — but learns about it a few years later. Denise decides to go back and file the form along with a Reasonable Cause letter package. This should be a civil violation with no criminal tax implications.

Unintentional Form 3520 Quiet Disclosure (Example 2)

Peter is a Lawful Permanent Resident who also received a foreign gift from a family member. It was a relatively large foreign gift and exceeded the Form 3520 threshold filing requirements. Peter is aware that he should have filed the form and decides to go back in file for the prior year, but does not submit a reasonable cause statement. In this type of situation, this can be considered a quiet disclosure but it was unintentional — and therefore should not be a criminal violation.

Intentional Form 3520 Quiet Disclosure (Example 3)

Felicia is a US citizen who has family members abroad. Her grandma is a non-US person and recently passed away, leaving her a very large foreign inheritance. Felicia was aware that she was supposed to report the inheritance but did not do so. She also knew she was reqired to report her foreign accounts to report, but intentionally did not report those either. Thus, Felicia is already willful in that she intentionally and knowingly did not report a foreign gift that she knew she was supposed to report at the time.

A few years later, Felicia submits to the Streamlined Procedures and submits a statement under penalty of perjury that she was unaware of the reporting of her foreign money. Later down the line, when she was audited on a separate issue, the IRS inquires about the foreign reporting and it turns out that her former CPA had already notified the IRS as part of a separate OPR investigation that the CPA tells all of his clients about the foreign reporting. In addition, Felicia’s foreign bank had already sent her a FATCA (Foreign Account Tax Compliance Act) letter. While this is not necessarily per se criminal, it could lead to a special agent investigation and could result in criminal prosecution.

Current Year vs Prior Year Non-Compliance

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year’s international reporting forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign IRS tax forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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