Form 3520 Penalty Appeal

Form 3520 Penalty Appeal

Form 3520 Penalty Appeal 

Form 3520 Penalty Appeal: When the IRS issues a penalty for not timely or accurately filing a Form 3520, the penalties can be tough. When it comes to foreign gifts, the penalty is usually 25% of the value of the gift. When it comes to trusts, the penalties stagger based on the type of trust transaction involved. When a person receives a Form 3520 Penalty, it is usually in the form of a CP15 Notice. And, in recent years, the IRS has begun aggressively issuing automatic assessment of penalties.

Taxpayer Receives a CP15 Notice of Penalty

Here is a common example: Peter receives a gift from his relatives in Taiwan for $900,000. He hired a CPA — who misunderstood the foreign gift and trust reporting rules — to handle his international tax return.  The CPA realizes (after the fact) that the Form 3520 should have been filed, so they hire a “self-proclaimed tax expert” to handle the case. The reasonable cause letter is not an IRS form, and the law firm does not know how to write an effective reasonable cause letter. The Lawyer slaps together a sloppy Reasonable Cause letter. The letter is received by the IRS and then radio silence.

16-months later, Peter receives a CP15 Notice for $225,000.

What happened!?

26 USC 6039F

The $225,000 penalty was issued based on the penalty being 5% (of the value of the gift) per month — for a maximum of 25%. 

(Pre-Appeal) The Attorney Files the Initial Protest

Before it is time to litigate a Form 3520 penalty, the IRS CP15 Notice provides an opportunity to dispute the penalty based on reasonable cause and the CP15 Notice gives Taxpayer  30-days to respond.

Most CP15 Notices provide the following:

6039F Reasonable Cause

      • “If you believe you have reasonable cause for your failure to comply, you may send us a written statement (include any documents that will support your position) within 30 days from the date of this notice.

      • The statement must list all the facts you’re claiming as reasonable cause for the failure, and it must contain a declaration that the statement is made under penalties of perjury.”

The CP15 Notice is from the IRS and the initial protest (pre-appeal) goes back to the IRS for the first round of Reasonable Cause penalty abatement review.

Form 3520 Reasonable Cause Letter Rejected LTR 854C

If the Form 3520 protest letter is rejected, Taxpayer will usually receive a follow-up Letter 854C — and here is where it can get (unnecessarily) complicated. At this stage, the Taxpayer can submit a supplemental response to their initial protest letter that was sent to the IRS — if they have “additional information” to present. The IRS Office of Appeals may reconsider the request, and may schedule a conference with Appeals — or not — depending on the specifics of the presentation and officer assigned to the matter.

Appeals Conference

If the protest was rejected, Taxpayer usually gets 60-days to go to appeals — and the result is binding on both parties. If Taxpayer submits the follow-up to the initial protest to appeals — but is still rejected — and does not pay the penalty — they will at some point in the future receive a Notice of Lien or Intent to Levy — which opens the door to pursue a CDP (which provides more opportunity to dispute the penalty). But, if the Taxpayer had submitted to Appeals already, the IRS can then try to take the position that the prior conference  was the bite at the apple and the CDP would be rejected. Therefore, before sending any post-protest letter to the IRS, Taxpayers and their counsel should review the pros and cons of each approach.

Beware that CDP is an End-Game Opportunity

The benefits of a Collection Due Process hearing is that it permits the Taxpayer to essentially get two bites of the apple — and it opens the door to go to Tax Court on multiple different arguments. But, the Taxpayer usually has to wait until they receive a Notice of Federal Tax Lien or Intent to Levy before they can pursue a CDP. To the inexperienced international tax attorney — these are just hurdles the Taxpayer must overcome in order to get to the Collection Due Process Hearing stage.

But, to the people involved — these are real concerns that impact their day-to-day life.

Meet our International Tax Lawyer Specialist Team

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with late reporting of Forms 3520 and 3520-A.

Contact our firm today for assistance.

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