How Long Can IRS Assess Form 3520/3520-A Trust Penalties?

How Long Can IRS Assess Form 3520/3520-A Trust Penalties?

Extension of Time for IRS to Assess Foreign Trust Penalties

Update to our original 2021 article.

Recently, the United States Tax Court in Fairbank issued a very important ruling about how penalties can be assessed for late-filed international tax forms. We previously detailed the Fairbank case in a separate article that you can access here. In addition, back in late February, we summarized how the IRS Statute of Limitations works in international tax matters, and specifically how the statute of limitations can be extended in order to assess international penalties beyond the general three-year statute under 6501(c)(8) for Forms 3520, 3520-A, 5471, and 5472 — with references to the Fairbank ruling. In this article, we hone in on foreign trust reporting and Form 3520/3520-A — since Form 3520 and Form 3520-A penalty assessments have been on the rise, more so than many of the other international IRS forms. US Persons who own foreign trusts are required to file Form 3520 and Form 3520-A to report their ownership to the IRS. The due date for filing Form 3520 is April and the due date for filing Form 3520-A is usually March (extensions are filed on Form 7004). But what happens if the Taxpayer never files Forms 3520 or 3520-A — or files a different, yet incorrect, international information reporting form? According to the Faribank case, the Taxpayer may be on the hook for IRS penalties several years after the 3-year statute would have ordinarily expired and even if the original tax return was filed timely.

Form Filing Extension vs Extending Statute of Limitations

It is important to note the distinction between filing an extension form and extending a statute of limitations.  Filing an extension Form to extend the time to file Form 3520 (Form 4868) or Form 3520-A (Form 7004) is submitted to the IRS (by the Taxpayer) in order to extend the time for filing the form timely. When a statute of limitations is ‘extended,’ it means that the IRS seeks additional time to assess, enforce, and collect penalties.

The focus of this article is the extension of the Statute of Limitations by the IRS against the Taxpayer.

Due Date for Filing Form 3520/3520A

As provided by the IRS:

Form 3520

      • “[I]n general, a U.S. person’s Form 3520 is due on the 15th day of the 4th month following the end of such person’s tax year for income tax purposes, which, for individuals, is April 15. If, however, on the due date of your income tax return, you are a U.S. citizen or resident who qualifies for one of the following conditions, then your Form 3520 is due on the 15th day of the 6th month (June 15) following the end of your tax year for income tax purposes.”

Form 3520-A

      • File a complete Form 3520-A (including the statements on pages 3 through 5) with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409, by the 15th day of the 3rd month after the end of the trust’s tax year. However, if you are filing a substitute Form 3520-A with your Form 3520, then your substitute Form 3520-A is due by the due date of Form 3520.

26 U.S.C. 6501

      • (a) General rule

        • Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

(8) Failure to notify Secretary of certain foreign transfers

  • (A) In general

    • In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.

  • (B) Application to failures due to reasonable cause

    • If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.

Relevance of 6048 and Forms 3520 and/or 3520-A

Section 6048 is referenced above under 6051(c)(8). And, 26 USC 6048 refers to foreign trusts as follows:

26 U.S. Code § 6048 – Information with respect to certain foreign trusts

      • (a) Notice of certain events

        • (1) General rule

          • On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).

        • (2) Contents of notice

          • The notice required by paragraph (1) shall contain such information as the Secretary may prescribe, including—

            • (A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and

            • (B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.

        • (3) Reportable event

          • For purposes of this subsection—

            • (A) In general The term “reportable event” means—

              • (i) the creation of any foreign trust by a United States person,

              • (ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and

              • (iii) the death of a citizen or resident of the United States if—

                • (I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or

                • (II) any portion of a foreign trust was included in the gross estate of the decedent.

The Statute of Limitations for Form 3520/3520-A Penalties Can be Extended

Regarding the code sections and IRS forms identified above, if the taxpayer does not file the form, the three-year statute of limitations does not begin to run. This may result in a Taxpayer being severely penalized several years after the statute limitations would have already expired for a timely filed return – if the return had been filed by the taxpayer. Noting, if the taxpayers are able to show reasonable cause and not willful neglect, they may be able to avoid penalties.

Fairbank Case

In the recent tax court case of Fairbank, Section 6501(c)(8) was front and center on the issue of the statute of limitations for filing Form 3520/3520-A for an entity in which another international reporting form was already filed.

Let’s take a look at how the court ruled:

      • “Now we turn to section 6048(b) and (c) to determine the statutory reporting obligations of Mrs. Fairbank as the United States owner and beneficiary of Xavana Establishment and whether petitioners have furnished the information required to be reported under that section. Section 6048(b), entitled “United States Owner of foreign trust,” provides that each United States person treated as the owner of any portion of a foreign trust shall be responsible to ensure that (A) the trust makes a return for the year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe and (B) the trust furnishes such information as the Secretary may prescribe to each United States person (i) who is treated as the owner of any portion of the trust or (ii) who [*23] 24 [*24] receives (directly or indirectly) any distribution from the trust. I.R.C. § 6048(b)(1).

      • Section 6048(c), entitled “Reporting by United States beneficiaries of foreign trusts,” provides that any United States person who receives (directly or indirectly) during any taxable year of the person any distribution from a foreign trust shall make a return with respect to that trust for the year which includes (A) the name of the trust, (B) the aggregate amount of the distributions so received from the trust during the taxable year, and (C) the other information as the Secretary may prescribe. I.R.C. § 6048(c)(1). Petitioners’ citation of section 6501(c)(8) and their argument on brief that the period of limitations has run is incomplete.31 Section 6501(c)(8) refers the reader to the requirements under section 6048; therefore, a detailed analysis of a taxpayer’s statutory obligations under section 6048 is necessary.

      • We conclude that Mrs. Fairbank, as the deemed U.S. owner of Xavana Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of Xavana Establishment’s activities for the years at issue. See I.R.C. § 6048(b)(1). Similarly, we conclude that Mrs. Fairbank, as Xavana Establishment’s U.S. beneficiary, has failed to make any return that includes the name Xavana Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from Xavana Establishment. See I.R.C. § 6048(c)(1).

      • Finding that petitioners have not complied with section 6048(b) and (c), we similarly find that the period of limitations has not expired under section 6501(c)(8). Our conclusion is consistent with those of other courts that have considered this issue. See Rost, 44 F.4th at 298; Wilson, 6 F.4th at 434. Accordingly, we are constrained to conclude that the period of limitations has not expired for the tax years at issue since petitioners neither filed IRS Form 3520–A or Form 3520 nor satisfied their reporting obligations under section 6048, assuming those obligations could be satisfied without the filing of the forms prescribed by the IRS.32 Consequently, we find respondent’s notice of deficiency in this case was timely issued.”

Always Try to Show Reasonable Cause

Practitioners should keep in mind that the court made a specific note that taxpayers did not make a sufficient claim for reasonable cause. Thus, Taxpayers may have been able to avoid the penalties if they could show reasonable cause:

      • “In a 2010 amendment to section 6501(c)(8), Congress added a reasonable cause exception for failure to furnish the information required under this section, effective for returns filed after March 18, 2010. Petitioners did not adequately raise the issue of reasonable cause for their failure to comply with the reporting obligations under section 6048.”

Current Year vs Prior Year Non-Compliance

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

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Golding & Golding: About Our International Tax Law Firm

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