How Wrzesinski Defeated the IRS on Foreign Gift Penalties

How Mr. Wrzesinski Defeated the IRS on Foreign Gift Penalties

The IRS Caved to Taxpayer in 3520 Penalty Case

In recent years, the Internal Revenue Service has significantly increased enforcement of foreign account compliance matters. And, Form 3520 –which is used to report large foreign gifts to U.S. persons — has been a favorite enforcement tool by the IRS. Form 3520 has several purposes, but one of the main purposes of the form is for use by taxpayers who are US persons and receive gifts from non-resident aliens to have to report the gift to the IRS. The form is primarily for reporting these types of gifts and not for income tax purposes; these gifts are typically not taxable for income tax purposes. Nevertheless, the IRS has fallen into the habit of issuing automatically assessed penalties against taxpayers who filed the form late, even when they file proper IRS protocol. While taxpayers have the opportunity to show reasonable cause to avoid penalties or submit to the Delinquent International Information Return Submission Procedures (DIIRSP, pre-11/2020) and avoid penalties — the IRS was still issuing penalties, even if the Taxpayer qualified for a penalty waiver or abatement. In the case of Wrzesinski, the Taxpayer filed a lawsuit against the U.S. government based on an improper penalty being issued against him and at the end of the day was able to successfully get the IRS to acquiesce and abate his penalties. Let’s take a brief look at what happened in this case:

Polish Resident Mom Gifts Son Money

• • • “In 2010, Plaintiff’s mother, Barbara Wrzesinska, a citizen and resident of Poland,having won the Polish lottery, decided to make a gift to her son of $830,000.”

Taxpayers Received Incorrect Tax Advice

• • • “Taxpayer spoke with his accountant (an Enrolled Agent authorized to practice before the Internal Revenue· Service) ‘who advised Plaintiff that there was no need to include the gift on his U.S. tax returns and that there was no other U.S. legal ‘requirement to be complied with in connection with Plaintiff’s mother’s gift.”

Later Taxpayer Learns About Form 3520/6039F

• • • “In April of 2018, Plaintiff, who wished to give some of the gift money to his godson in Poland, performed an Internet search of “foreign gifts” and came across various articles which mentioned ‘the legal requirement imposed on U.S. taxpayers to report large gifts from foreign individuals.”

Taxpayer Submits to DIIRSP

• • • ‘Plaintiff, who previously had no reason to suspect that the advice given…with respect to the reportability of his mother’s gift was erroneous, was shocked by this discovery and immediately contacted a Philadelphia tax attorney with expertise in the U.S. laws relating to foreign accounts and assets. Plaintiff was advised by the tax attorney that the gifts from his mother should have been reported to’ the IRS on Form 3520 pursuant to Section 6038F of the Internal Revenue, Code, 26 U.S.C. § 6038F, but that the Internal Revenue Service offered a program known as “Delinquent International Information Return Submission Procedures” which Plaintiff could use to belatedly achieve compliance provided he could demonstrate “reasonable cause” for the untimely filing.”

Plaintiff is Penalized by the IRS Despite DIIRSP

• • • On or about May 9, 2019, Plaintiff received Form CP15 Notices of Penalty Charge under 26 U.S.C. § 6039F assessing penalties of $87,500.00 and $120,000.00 for tax years 2010 and 2011, respectively, for “Failure to File Form 3520 to Report Receipt of Certain Foreign Gifts,” which amounted to 25 percent of the value of the gifts made in each of those years.

Plaintiff Protests Penalty, Files Appeal & Gets Lost in IRS System

• • • Plaintiff filed a Protest with the Internal Revenue Service Appeals Division on or about June 26, 2019 from the CP15 Notices of Penalty Charge.  Plaintiffs appeal was somehow lost in the “system,” requiring intervention by the Taxpayer Advocate Service, which ultimately resulted in-the appeal being assigned to an Appeals Officer in the Los Angeles, California office of the IRS Appeals Division.

Appeals Division Abates Some, Not All of the Penalties

After some time, the case made its way to appeals and the penalties should have all been abated, but Appeals did not abate the full penalty amount:

• • • “The IRS nevertheless erroneously assessed severe penalties against Plain’ tiff under Section 6039F totaling $87,500.00 for tax year 2010 and $120,000.00 for tax year 2011 for “Failiure to File Form 3520 to Report Receipt of Certain Foreign Gifts.”

    • In response to the Protest filed by Plaintiff challenging the erroneous penalty assessment, the Appeals Division abated $70;000 of the $87,000 penalty assessed for tax year, 2010 and $96,000 of the $120,000 penalty assesed for tax year 2011, indicating: “Case resolution based on ‘Hazards of Litigation”‘; the remaining $41,500 in penalties was sustained.”

The IRS Concedes to Taxpayer

• • • “On February 7, 2023, the United States informed Plaintiff’s counsel by letter that the United States conceded the matter and directed the Internal Revenue Service to schedule an overpayment for the Plaintiff for tax years 2010 and 2011.”

Late Filing Penalties May be Reduced or Avoided

It is important to note that for many Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs that work well to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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 who 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.